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
September 4, 2015
Swiss Finance Institute Research Paper No. 12-21
This paper provides estimates of aggregate preferences, beliefs, and sentiment from option prices and historical returns. Our market-based estimates correlate well with independent survey-based estimates, and yet deliver several novel insights. Our analysis points out two significant issues related to overconfidence. First, the Baker-Wurgler index strongly reflects excessive optimism but not overconfidence. Second, optimism and overconfidence comove over time and 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: 43
Keywords: Sentiment, Pricing Kernel, Optimism, Overconfidence, Option Data
JEL Classification: G02, G12
Date posted: May 18, 2012 ; Last revised: September 8, 2015
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