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

Schadner, Wolfgang, Fear and Laughing of the Market: Trending Pessimism, Fragile Optimism (September 25, 2020). Available at SSRN: https://ssrn.com/abstract=3699323 or http://dx.doi.org/10.2139/ssrn.3699323

Wolfgang Schadner (Contact Author)

University of St. Gallen


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