Investor Sentiment and Value and Growth Index Options
37 Pages Posted: 7 Aug 2011 Last revised: 15 Dec 2011
Date Written: July 15, 2011
This paper examines the relationship between investor sentiment and stock index options. More specifically, it investigates the contrasting impact of individual and institutional investor sentiment on value and growth stock options. We take the Nasdaq 100 and Russell 2000 Growth indexes as proxies for growth portfolios and the Michigan Consumer Confidence Index as a proxy for individual sentiment. The findings show that individual sentiment exerts a significantly positive impact on the risk-neutral skewness of the Nasdaq 100 and Russell 2000 Growth index options while it is unrelated to the risk-neutral skewness of the Russell 2000 Value index option. Our empirical results support the conjecture that options on growth stock indexes are more likely to be affected by individual investor sentiment because proportionally more individual customers trade these contracts as compared with those on value indexes.
Keywords: Risk-neutral skewness, value premium, option market anomalies
JEL Classification: G12, G13
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