Aggregate Investor Sentiment and Time-Varying Price Discovery: Evidence from the Options Market

Yaping Zhou and Dayong Lv
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Yaping Zhou: Antai College of Economics and Management, Shanghai Jiao Tong University, Shanghai, China
Dayong Lv: School of Financial Technology, Shanghai Lixin University of Accounting and Finance, Shanghai, China

Economic Analysis Letters, 2023, vol. 2, issue 2, 1-6

Abstract: Previous literature shows that the price-discovery ability of options market varies substantially over time. Using data of Shanghai Stock Exchange 50 exchange-traded fund options, this paper shows that options prices contribute relatively less to price discovery during low-sentiment periods, but the price-discovery ability of options market remains unchanged during high-sentiment periods. These results suggest that change in aggregate investor sentiment is an important source of the time variation in options’ price discovery ability. Moreover, the options market experiences greater bid-ask spreads when investor sentiment is lower, supporting a “transaction costs mechanism.” This paper fulfills related literature on the time variation in options’ price-discovery ability.

Keywords: Aggregate investor sentiment; price discovery; options market; China (search for similar items in EconPapers)
Date: 2023
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