SFB 303 Discussion Paper No. B - 426

Author: Abbink, Klaus, and Bettina Kuon
Title: An Options Pricing Experiment with Professional Traders
Abstract: This paper reports an option pricing experiment on the binomial model, which has been conducted with professional traders of financial assets. The experimental results are compared to a corresponding experiment with students. The data show that professional traders achieve lower arbitrage exploitation as well as lower expected payoffs, as a consequence of significantly lower probability sensitivity. This phenomenon is explained by an adaptive process of probability calibration, which is transferred from real financial markets without explicit probability distributions. Students without practical experience choose a more analytical approach considering the given probabilities to a stronger extent, which leads to higher performance.
Keywords: Option pricing, arbitrage, experiment, professional traders
JEL-Classification-Number: C91, G12, G14
Creation-Date: February 1998
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