Firm-specific sentiment and individual option's implied volatility slope

Bei Chen and Quan Gan

Review of Behavioral Finance, 2022, vol. 15, issue 5, 672-693

Abstract: Purpose - Previous literature shows that market sentiment and the steepness of index option's implied volatility slope have a negative relation. This paper investigates the relation between firm-specific sentiment and individual option's implied volatility slope both theoretically and empirically. Design/methodology/approach - The authors develop a simple model with option traders' sentiment heterogeneity to show that sentiment and the steepness of individual option's implied volatility slope have a positive relation. Findings - When firm-specific sentiment is higher (more bullish), individual option's implied volatility slope becomes steeper. The positive relation is stronger when option traders' beliefs on risk are more dispersed. Empirical results support the theoretical model predictions. Originality/value - Although both firm-specific sentiment and individual options implied volatility slope predict future stock returns, there is no research exploring the relation between them. In particular, none of previous studies associates implied volatility slope's stock return predictability to investor behavior such as sentiment. The authors’ findings provide a behavior-based explanation on why steep implied volatility slope negatively predicts cross-sectional stock returns.

Keywords: Implied volatility slope; Investor sentiment; Overnight returns; MAX; Vol-of-vol (search for similar items in EconPapers)
Date: 2022
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (text/html)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (application/pdf)
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eme:rbfpps:rbf-10-2021-0216

DOI: 10.1108/RBF-10-2021-0216

Access Statistics for this article

Review of Behavioral Finance is currently edited by Professor Gulnur Muradoglu

More articles in Review of Behavioral Finance from Emerald Group Publishing Limited
Bibliographic data for series maintained by Emerald Support ().