Media Sentiment and the Cross-Section of Option Returns
60 Pages Posted: 14 Apr 2022
Date Written: July 3, 2020
We examine the cross-sectional predictive ability of media pessimism for delta-hedged equity option returns. We find that a long-short portfolio that buys options of stocks with low media pessimism while going short options attached to high pessimism stocks, over the previous month, renders positive and statistically significant returns and alphas. Specifically, we find that delta-hedged options tend to be more overpriced when media pessimism is high. Our results are robust to the presence of transaction costs, different weighting schemes, different formation periods and cannot be explained by standard risk factor models.
Keywords: Media Sentiment, equity option returns, news releases, option trading
JEL Classification: G11, G12, G14, G32
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