Investor Heterogeneity, Sentiment, and Skewness Preference in Options Market
31 Pages Posted: 12 Feb 2016
Date Written: October 2015
This paper builds upon and extends Bali and Murray (2013) to investigate skewness preferences when investors with heterogeneous expectations hold long skewness positions. When investors are pessimistic (either pessimistic or optimistic), their overconfidence produces a downward (upward) bias which explains their negative (positive) skewness preference. When investors are optimistic, their overconfidence is reflected in the bottom skewness portfolio which explains why they show a negative skewness preference as a result of overestimation for this portfolio. The over-or-under-valuation takes place in the absence of a risk-premium.
Keywords: Risk-neutral Valuation, Market Selection Hypothesis, Price-optimist models
JEL Classification: G02, G11, G13
Suggested Citation: Suggested Citation