A note on rational call option exercise

✍ Scribed by Malin Engström

• Book ID: 102217849
• Publisher: John Wiley and Sons
• Year: 2002
• Tongue: English
• Weight: 92 KB
• Volume: 22
• Category: Article
• ISSN: 0270-7314
• DOI: 10.1002/fut.10020

✦ Synopsis

Abstract

Using Swedish equity option data, the rationality in the exercise of American call options is analyzed to see
how well it complies with the theoretical exercise rules. Although the exercise behavior appears to be rational
overall, several cases of both faulty exercise and failure to exercise are found. Almost a third of the early
exercised calls are exercised at other times than predicted by theory. Several of these exercise decisions could
potentially be explained by transaction costs, indicating that market frictions do affect the exercise behavior.
However, over two thirds of the faulty exercises cannot be explained at all. © 2002 Wiley Periodicals, Inc.
Jrl Fut Mark 22:471–482, 2002