Psychological Barriers in Financial Markets: Econometric Modeling and Options Pricing

In this two-year proposal, we would give a comprehensive analysis about the psychological barriers in both spot and option markets. We first propose a dynamic process of the underlying asset which incorporates the psychological barriers into consideration. The process is not only for the spot market but also for the option evaluation. Under an assumption about heterogeneous traders in financial markets and employing the wavelet transformations, which are mathematical tools for analyzing time series or images, we try to study if the psychological barriers effect is a universal phenomenon or it only exists in some kind of investors. Therefore, this project contributes to the behavior finance literature by estimating traders’ heterogeneous behaviors when the market approaches barriers.

Project ID:PF10406-2011
External Project ID:MOST104-2410-H182-004