With funding from the Provost and the Economics Department, I travelled to the 2013 EEA conference in Boston to present my honors thesis, ‘“Systematic Pricing Errors in the Black-Scholes Option Pricing Model Caused by Price Barriers.”
As the title suggests, my research explores the role of ‘price barriers’ in options pricing. I find three barriers to be important: round numbers, Bollinger bands and Gann levels. What is interesting about the research is that traditional models of options pricing rely on assumptions that rule out the existence of price barriers. Yet my econometric analysis of options data provides qualified support for the hypothesis that they exist and influence the volatility in options pricing. The intuition behind this result rests with behavioral biases that have formed the backbone of a relatively new area of research—behavioral finance. I received excellent feedback from the conference and continue my research under the direction of Professor Murphy and Professor Cadigan.