Research On The Option Pricing Model Based On Sentiment

In the process of the formation and development of modern financial theory,the problem of the rational pricing of options has always been the focus of the large number of researchers.The classic Black-Scholes model is an important landmark model in the history of option pricing.Under the assumption that the underlying asset price obeys the geometric Brown motion,we get the partial differential equation of European call option and become the general formula of option pricing.Then,Cox and other scholars proposed a discrete time option pricing model,i.e.binomial tree methods.These two models are still worldwide accepted.However,in recent decades,with the continuous development of the options market,a lot of empirical studies have found that the traditional option pricing theory is not consistent with the actual decision.The traditional option pricing models are based on the assumption that investors are rational and Efficient Market Hypothesis(EMH),but investors are hard to be completely rational in real life.After recognizing this,economists introduced individual's subjective factors and psychological factors into finance study fields in order to make theories more accord with realism,so the research upsurge of behavioral finance raised gradually.The thesis focuses on investor sentiment and the influence of investor sentiment on investor behavior and attempts to explore the investor sentiment influence on their behavior,and its influence on asset prices.The thesis tries to measure the investor sentiment with the empirical studies and then establish the influence mechanism of emotional variables and option price,and analyze the impact of emotion on option pricing.This paper introduced emotional factors based on the traditional option pricing model,combined the behavioral finance with the traditional option pricing theory and obtained the new option pricing model.It reflects the option price in the case of irrational investors.In this paper,we first conduct empirical research based on the data of Shanghai 50 ETF options market.Principal component method was used to get emotional variables and the relationship between emotional variables and option prices was analyzed.The relationship between option price and emotional variables was derived.Then,the option pricing model(binomial option pricing model and stochastic interest option pricing model)based on the emotion factors was constructed.Further,this paper carries out corresponding numerical simulation analysis and explanations,these results show that sentiment factor plays an important role in option pricing.Hence,this article helps investors to understand the behavior of derivatives prices and avoid investing risk.