Collective behavior and options volatility smile: An agent-based explanation |
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| Affiliation: | 1. College of Management and Economics, Tianjin University, Tianjin 300072, China;2. China Center for Social Computing and Analytics, Tianjin University, Tianjin 300072, China;3. CNRS, Centre d''Economie de la Sorbonne, Université Paris 1 Panthéon-Sorbonne, 106-112 Boulevard de l''Hôpital, Paris, France;1. Department of Applied Physics, School of Science, Hunan University of Technology, Zhuzhou 412007, PR China;2. Hebei Key Lab of Optic-electronic Information and Materials, The College of Physics Science and Technology, Hebei University, Baoding 071002, PR China;1. Shih Hsin University, Taipei, Taiwan;2. National Chengchi University, Taipei, Taiwan;3. Soochow University, Taipei, Taiwan;1. Department of Economics, Northern Illinois University, DeKalb, IL 60115, USA;2. Federal Reserve Board of Governors, 20th St. and Constitution Ave. NW, Washington, DC 20551, USA |
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| Abstract: | This paper represents an initial effect to shed light on the determinants of option implied volatility smile from the micro perspective of traders' behavior. We compare the zero intelligence behavior and the collective behavior with the agent-based simulation. We find that the constant implied volatility, which is the assumption of the Black–Scholes model, can be obtained under the environment of the zero intelligence traders; while the smile shape of implied volatility, which is more consistent with the practical option market worldwide, can be explained by traders' collective behavior. Moreover, different degrees of collective behavior are tested to result that with the increasing of collective degree the implied volatility curve becomes steeper. |
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