Essays on Expectations and Option Prices

Abstract

In my dissertation, I explain different empirical features of stock option prices through a framework which considers departure from rational expectations. Rational expectations assumes that agents in a model hold beliefs which are consistent with the “true” data generating process. However, as has been discussed extensively in the literature, rational expectations imposes unrealistic requirement on the information set of the agents in a model. However, I consider a framework where agents in the model are not aware of the pricing function that maps the equilibrium stock price with its fundamentals. In particular, they form beliefs about future stock price based on its historical realizations and their beliefs may be temporarily disconnected from movement in fundamentals. I show that introduction of such beliefs in a standard asset pricing model can help reconcile theory with the data.

Date of Award	16 Dec 2022
Original language	English
Supervisor	Albert Marcet Torrens (Director)