Wanted: behavioural finance models


Some might argue that this isn’t quite true. After the October 1987 crash, a skew appeared in equity options markets implying a fear of a downside that efficient market theory said should already be factored into stock prices. Since then, skews and smiles have become more pronounced in other markets too. Pricing theory sought to incorporate this ‘behavioural’ feature in the form of smile models, but this was more of an attempt to calibrate the models to option prices rather than analyse

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