Proceedings of the 2025 7th Management Science Informatization and Economic Innovation Development Conference (MSIEID 2025)

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The Impact of Investor Sentiment on Foreign Exchange Option Pricing—Based on the Sentiment-Adjusted Garman-Kohlhagen Model

Authors
Fanghui Ren1, Zhilong Li1, Xiangrong Wang1, *
1Shandong University of Science and Technology, Qingdao, Shandong, 266000, China
*Corresponding author. Email: xrwang@sohu.com
Corresponding Author
Xiangrong Wang
Available Online 15 February 2026.
DOI
10.2991/978-94-6463-996-4_11How to use a DOI?
Keywords
Investor sentiment; Foreign exchange options; Garman-Kohlhagen model; Sentiment adjustment
Abstract

Traditional foreign exchange option pricing models (such as the Garman-Kohlhagen model) commonly assume market rationality and largely exclude investor sentiment factors, thus leading to pricing deviations. By incorporating sentiment factors from China and the United States, this study constructs a sentiment-adjusted effective risk-free interest rate function and proposes a sentiment-adjusted foreign exchange option pricing model. Analysis reveals that rising sentiment in China leads to call option prices below theoretical values, while rising sentiment in the U.S. results in call option prices above theoretical values. Through mean squared error tests on both in-sample and out-of-sample data, the sentiment-adjusted model proves superior pricing accuracy compared to the traditional Garman-Kohlhagen model.

Copyright
© 2026 The Author(s)
Open Access
Open Access This chapter is licensed under the terms of the Creative Commons Attribution-NonCommercial 4.0 International License (http://creativecommons.org/licenses/by-nc/4.0/), which permits any noncommercial use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license and indicate if changes were made.

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Volume Title
Proceedings of the 2025 7th Management Science Informatization and Economic Innovation Development Conference (MSIEID 2025)
Series
Advances in Economics, Business and Management Research
Publication Date
15 February 2026
ISBN
978-94-6463-996-4
ISSN
2352-5428
DOI
10.2991/978-94-6463-996-4_11How to use a DOI?
Copyright
© 2026 The Author(s)
Open Access
Open Access This chapter is licensed under the terms of the Creative Commons Attribution-NonCommercial 4.0 International License (http://creativecommons.org/licenses/by-nc/4.0/), which permits any noncommercial use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license and indicate if changes were made.

Cite this article

risenwbib
TY  - CONF
AU  - Fanghui Ren
AU  - Zhilong Li
AU  - Xiangrong Wang
PY  - 2026
DA  - 2026/02/15
TI  - The Impact of Investor Sentiment on Foreign Exchange Option Pricing—Based on the Sentiment-Adjusted Garman-Kohlhagen Model
BT  - Proceedings of the 2025 7th Management Science Informatization and Economic Innovation Development Conference (MSIEID 2025)
PB  - Atlantis Press
SP  - 123
EP  - 136
SN  - 2352-5428
UR  - https://doi.org/10.2991/978-94-6463-996-4_11
DO  - 10.2991/978-94-6463-996-4_11
ID  - Ren2026
ER  -