Economics and Business
ISSN 2775-9237 (Online)
Published: 12 June 2020
Investor Behaviour Heterogeneity in the Options Market: Chartists vs. Fundamentalists in the French Market
Nahla Boutouria, Salah Ben Hamad, Imed Medhioub
University of Sfax (Tunisia), Imam Muhammad Ibn Saud Islamic University (Saudi Arabia)
Download Full-Text Pdf
Keywords: Behavioural Heterogeneity, Behavioural Finance, Fundamentalists and Chartists, Options Market, Black and Scholes, Implied Volatility, Two-State Markov Switching Model
Behavioural finance confirmed the existence of two types of agents, fundamentalists and chartists, in the financial market. Fundamentalists follow the traditional efficiency market theory based on adaptive learning rule, whereas chartists follow the price tendency and past price movements. This paper examines the heterogeneity between fundamentalists and chartists. To this aim, we propose to introduce a sentiment variable in the classic model of Black and Scholes (1973) and to extract in a novel way the implied volatility variable. After that, we estimate the Markov switching model on this variable to test heterogeneity in the French market. The estimated daily data from 2009 to 2018 for 30 companies daily of CAC40 in a sectoral analysis confirm the evidence of heterogeneity between chartists and fundamentalists.
Barberis, N., A. Shleifer, and Vishny, R. (1998). A Model of Investor Sentiment. Journal of Financial Economics 49(3), pp. 307–345.
Benninga, S. and Mayshar, J. (2000). Heterogeneity and option pricing. Review of Derivatives Research 4, pp. 7-27.
Black, F. and Scholes, M. (1973). The Pricing of Options and Corporate Liabilities. Journal of Political Economy 81 (3), pp. 637–654.
Boswijk, H. P., Hommes, C. H. and Manzan, S. (2007). Behavioral Hetreogeneity in Stock Prices. Journal of Economic Dynamics and Control 31(6), pp. 1938–1970.
Brock, W. A. and Hommes, C. H. (1997). A Rational Route to Randomness. Econometrica 65(5), pp. 1059–1095.
Brock, W. A. and Hommes, C. H. (1998). Heterogeneous beliefs and routes to chaos in a simple asset pricing model. Journal of Economic Dynamics Control 22, pp. 1235-1274.
Buraschi, A. and Jiltsov, A. (2006). Model uncertainty and option markets with heterogeneous beliefs. Journal of Finance, 61(6), pp. 2841-2897.
De Bondt, W. F. M. and Thaler, R. H. (1985). Does the stock market overreact? Journal of Finance 40, pp. 793-808.
de Grauwe, P. and Dewachter, H. A. (1993). Chaotic model of the exchange rate: The role of fundamentalists and chartists. Open Econ Rev 4, pp. 351–379.
De Long, J. B., Shleifer, A., Summers, L. and Waldmann, R. (1990). Noise Trader Risk in Financial Markets. Journal of Political Economy 98(4), pp. 703–738.
Ferrara, L. (2003), A three-regime real-time indicator for the US economy, Economic Letters 81, pp. 373–378.
Frankel, J. A. and Froot, K. A. (1986). Understanding the US Dollar in the Eighties: the expectations of Chartists and Fundamentalists. The Economic Record, pp. 24 – 38.
Frankel, J. and Froot, K.A. (1990). Chartists, Fundamentalists, and Trading in the Foreign Exchange Market. American Economic Review 80 (2), pp. 181–185.
Guirat, R. (2011). Asset price dynamic with heterogeneous agents. Economics Bulletin 31(2), pp.1-18.
Kahneman, D. and Tversky, A. (1979). Prospect Theory: An Analysis of Decision under Risk. Econometrica 47(2), pp. 263-291.
Shefrin, H. (2001). On kernels and sentiment. Working Paper, Santa Clara University.
Shiller, R.J. (1984). Stock Prices and Social Dynamics. Brookings Papers on Economic Activity, 1984, pp. 457-498.
Westerhoff, F. and Dieci, R. (2006). The effectiveness of Keynes-Tobin transaction taxes when heterogeneous agents can trade in different markets: a behavioral finance approach. Journal of Economic Dynamics and Control, 30, pp. 293-322.