Option pricing model with sentiment

Chunpeng Yang (), Bin Gao and Jianlei Yang
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Chunpeng Yang: South China University of Technology
Bin Gao: South China University of Technology
Jianlei Yang: Hebei University of Technology

Review of Derivatives Research, 2016, vol. 19, issue 2, No 3, 147-164

Abstract: Abstract In this paper, we develop a closed-form option pricing model with the stock sentiment and option sentiment. First, the model shows that the price of call option is amplified by bullish stock sentiment, and is reduced by stock bearish sentiment, and the price of put option is in the opposite situation. Second, the price of call option is more sensitive to bullish stock sentiment; the price of put option is more sensitive to bearish stock sentiment. Third, the price of call option increases substantially with respect to the stock sentiment and the option sentiment. The price of put option decreases substantially with respect to the stock sentiment, increases substantially with respect to the option sentiment. Fourth, our models also reveal that the option volatility smile is steeper (flatter) when the stock sentiment becomes more bearish (bullish). Finally, stock sentiment and option sentiment lead to the option price deviating from the rational price. The model could offer a partial explanation of some option anomalies: option price bubbles and option volatility smile.

Keywords: Stock sentiment; Option sentiment; Option pricing model; Option price bubbles; Option volatility smile (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (6)

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DOI: 10.1007/s11147-015-9118-3

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