Title: Traders' Behavior in Financial Markets: Paris Option Market Case
Abstract: Introduction The volatility prediction is essential to understand the functioning of financial markets, so that agents are able to develop their strategies. This hypothesis seems somewhat flimsy in the presence of market option. Indeed, some agents neglect the volatility's variables when it comes to trading activity on the options market. They buy when they forecast calls bullish on the underlying value and in the opposite case, they buy puts. Thus, investors spend overly high costs for the purchase and sale of option contracts even if their expectations about the underlying trends are not biased. It is now recognized that the implied volatility is a good estimator of realized volatility. These aspects of option contracts have been ignored in theoretical models; however the prices of options can be proxies to understand the interactions between agents explained by the phenomenon of switching and what distinguishes optional markets compared to another markets. Our study is based on the assumption that Paris Option Market precedes spot market in terms of transmission and dissemination of information. So this is privileged active agents that form heterogeneous expectations on volatility. When a large fraction of agents speculating on changes in volatility, market makers require additional transaction costs to cover their positions, so that investors wishing to invest on future price trends can pivot between the two markets. However, an agent may have interest in trading the option market even his anticipation is different to that market. The speculative activity in options market appears to be a standard, and so can the predictive performances of option contracts on the underlying. Various research works such as those of De Grauwe and Grimaldi (2005), Lux (2009), Chiarella and al (2009), and LeBaron (2006), tried to get clarification on agents behavioral in financial market. However, this literature that aimed to describe the evolution of stock prices completely ignored the alternative hypothesis of homogeneity of behavior. Considering the heterogeneity of behavior, their classifications and their potential strategies, we could probably evaluate the desires of its traders and the impact of their price negotiations and on the volatility process. Until now, most researches are based on experimental studies and through determinist's techniques and stochastic simulation to detect the presence of agents that can explain some stylized facts of returns on financial markets. And relevant questions arise about this topic: How heterogeneous market expectations affect option prices? Are proportions of the agents in the Paris Options Markets fixed or variable? And if it's variable, what is the cause? Is this variability rather persistent or fixed? What is the cause of switching between operating? Heterogeneous Speculative Rule Divergence from the assumption of rationality implies that one can introduce heterogeneity in anticipations as well; it's only a way of being rational, while there are many ways to be irrational. There are three explanations for being heterogeneous that we can discern from the literature. The first one is the existence of asymmetric information. Different market participants are assumed to hold different sets of information, where the information is common for all participants and a part is private. The concept of asymmetric information was first introduced in the new classical theory of the macro economy, where negotiators were assumed to be unable to obtain information that is public in other parts of the economy, and where negotiators are rational in the Muth (1961) sense in that they use the information that is accessible to them in the finest possible way to form their expectations of a particular variable. Second is the claim that negotiators might differ in the way (symmetric) information is interpreted. To argue why the difference in interpretation occurs we can follow the rational belief theory due to Kurz (1994), which assumes that heterogeneity of beliefs is caused by the fact that economic negotiators do not know the structural relations of the economy. …
Publication Year: 2013
Publication Date: 2013-01-01
Language: en
Type: article
Access and Citation
AI Researcher Chatbot
Get quick answers to your questions about the article from our AI researcher chatbot