Sentiment, Risk Aversion, and Time Preference

Giovanni Barone-Adesi, Loriano Mancini and Hersh Shefrin
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Giovanni Barone-Adesi: University of Lugano, Ecole Polytechnique Fédérale de Lausanne, and Swiss Finance Institute
Loriano Mancini: Ecole Polytechnique Fédérale de Lausanne and Swiss Finance Institute
Hersh Shefrin: Santa Clara University

No 12-21, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We estimate aggregate preferences, beliefs, and sentiment from option prices and historical returns. Our market-based estimates correlate well with independent survey-based estimates, and yet provide a number of novel insights. Our analysis points out two significant issues related to overconfidence. First, the Baker--Wurgler index strongly reflects excessive optimism but not overconfidence. Second, optimism and overconfidence comove over time and generate a perceived negative risk-return relationship, while objectively the relationship is positive. The appendices for this paper are available at the following URL: http://ssrn.com/abstract=2295896

Keywords: Sentiment; Pricing Kernel; Optimism; Overconfidence; Option Data (search for similar items in EconPapers)
JEL-codes: G02 G12 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2012-05
New Economics Papers: this item is included in nep-neu and nep-upt
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1221

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