Download this Paper Open PDF in Browser

Investor Sentiment and Option Prices

Dice Center Working Paper No. 2004-2

AFA 2006 Boston Meetings

34 Pages Posted: 19 Mar 2005  

Bing Han

University of Toronto, Rotman School of Management

Multiple version iconThere are 2 versions of this paper

Abstract

This paper examines whether investor sentiment about the stock market affects prices of the S&P 500 options. I find that the index option volatility smile is steeper (flatter) and the risk-neutral
skewness of monthly index return is more (less) negative when market sentiment becomes more bearish (bullish). These significant relations are robust and become stronger when there are more
impediments to arbitrage in index options. They can not be explained by rational perfect-market based option-pricing models. Changes in sentiment help explain time variation in the slope of index option smile and risk-neutral skewness beyond factors suggested by the current models.

Keywords: sentiment, pricing kernel, skewness, limits to arbitrage, index option smile

JEL Classification: G12, G13, G14, G10

Suggested Citation

Han, Bing, Investor Sentiment and Option Prices. Dice Center Working Paper No. 2004-2; AFA 2006 Boston Meetings. Available at SSRN: https://ssrn.com/abstract=687537 or http://dx.doi.org/10.2139/ssrn.687537

Bing Han (Contact Author)

University of Toronto, Rotman School of Management ( email )

Toronto, Ontario M5S 3E6
Canada
4169460732 (Phone)

Paper statistics

Downloads
1,178
Rank
13,538
Abstract Views
4,147