Sentiment, Risk Aversion, and Time Preference
Swiss Finance Institute at the University of Lugano; Swiss Finance Institute
Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute
Santa Clara University - Leavey School of Business
October 22, 2014
Swiss Finance Institute Research Paper No. 12-21
This paper provides empirical estimates of aggregate investors' sentiment, risk aversion and time preference in a unified setting, using option and stock prices. Our market-based estimates correlate well with independent survey-based estimates, and yet provide additional insights. Specifically, our analysis points out two significant issues related to overconfidence. First, the Baker-Wurgler index strongly reflects excessive optimism but not overconfidence. Second, the dynamics of optimism and overconfidence generate a perceived negative risk-return relationship, while objectively the relationship is positive.
The appendices for this paper are available at the following URL: http://ssrn.com/abstract=2295896
Number of Pages in PDF File: 44
Keywords: Sentiment, Pricing Kernel, Optimism, Overconfidence, Option Data
JEL Classification: G02, G12
Date posted: May 18, 2012 ; Last revised: October 23, 2014
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