Fear and Laughing of the Market: Trending Pessimism, Fragile Optimism
27 Pages Posted: 11 Nov 2020
Date Written: September 25, 2020
Building on fractional Black-Scholes, this paper draws a connection between option implied Hurst exponent H and current market mood. H comes with several advantages over VIX and survey based sentiment measures, such as a straight forward interpretation (optimistic/pessimistic) or the highly frequent data availability. From global evidence, we find strong correlations of H with a broad range of well established sentiment gauges. Analyzing H in more detail, investor fear occurs much faster than confidence is gained back. From periodical plus rolling long-term memory analysis for eight major regions around the globe, we observe that persistence in sentiment is depended on its level: the higher the market mood, the more overreacting and fragile it becomes. Other way around, if pessimism rises, then the mood gets stable and trending.
Keywords: Market Mood, Investor Sentiment, Implied Volatilities, Long-Term Memory, Fractal Analysis
JEL Classification: G01, G12, G4, G15
Suggested Citation: Suggested Citation