An Agent-Based Approach to Option Pricing Anomalies

Psychological studies on decision-making under uncertainty, which have been inspired by Kahneman and Tversky´s study, have attracted considerable interest in financial research as key factors to solve anomalies that cannot be explained by the traditional models. Recently, we proposed an agent-based prospect theoretical model and demonstrated that the loss-aversion feature of investors is capable of explaining a large number of financial stylized facts. This paper aims to extend the previous work to the field of option pricing. Two important anomalies in the field - the implied volatility smile and the skewness premium - will be analyzed. This study can be considered as an attempt to integrate the behavioral financial theory and the option pricing theory by using the agent-based approach.