Print Email Facebook Twitter Cumulative Prospect Theory in Option Valuation and Portfolio Management Title Cumulative Prospect Theory in Option Valuation and Portfolio Management Author van Tol, Lieselotte (TU Delft Electrical Engineering, Mathematics and Computer Science) Contributor Oosterlee, Kees (mentor) Kraaikamp, Cornelis (graduation committee) Fokkink, Robbert (graduation committee) Degree granting institution Delft University of Technology Date 2018-07-06 Abstract This thesis deals with different models for decision-making under risk in financial applications, mainly models that incorporate irrational human behavior. First of all, traditional expected utility theory is considered. Hereafter, two models that incorporate irrational human behavior are discussed and compared: prospect theory and cumulative prospect theory. Next, these models are applied to option pricing. The influence of various levels of sentiment on the option price is investigated and the prices are compared with Black-Scholes prices. Also, a sensitivity analysis is done in order to investigate the influence of the prospect parameters on the option price. Furthermore, the different models discussed are applied to portfolio management for which the optimal wealth profiles are analyzed and compared. Moreover, a data analysis with a portfolio of stocks of different indices is done in which it is investigated whether the parameter estimates used for prospect sentiment are applicable to financial data. Finally, a hedge test under prospect sentiment is performed in order to investigate whether a delta-hedge leads to sufficient results in case of asset price paths under prospect sentiment. Subject cumulative prospect theoryoption valuationportfolio management To reference this document use: http://resolver.tudelft.nl/uuid:096c4bb1-74b1-4ae3-929c-02b547efbc59 Part of collection Student theses Document type master thesis Rights © 2018 Lieselotte van Tol Files PDF finalreport_LJMvanTol.pdf 1.68 MB Close viewer /islandora/object/uuid:096c4bb1-74b1-4ae3-929c-02b547efbc59/datastream/OBJ/view