Investor Heterogeneity, Sentiment, and Skewness Preference in Options Market

31 Pages Posted: 12 Feb 2016

See all articles by Aristogenis Lazos

Aristogenis Lazos

University of Essex

Jerry Coakley

University of Essex - Essex Business School

Xiaoquan Liu

Nottingham University Business School

Date Written: October 2015

Abstract

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

Lazos, Aristogenis and Coakley, Jerry and Liu, Xiaoquan, Investor Heterogeneity, Sentiment, and Skewness Preference in Options Market (October 2015). Available at SSRN: https://ssrn.com/abstract=2731641 or http://dx.doi.org/10.2139/ssrn.2731641

Aristogenis Lazos (Contact Author)

University of Essex ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

Jerry Coakley

University of Essex - Essex Business School ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom
+44 1206 872455 (Phone)
+44 1206 873429 (Fax)

HOME PAGE: http://www.essex.ac.uk/afm/staff/coakley.shtm

Xiaoquan Liu

Nottingham University Business School ( email )

199 Taikang East Road
Yingzhou
Ningbo, Zhejiang 315100
China

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