How Does Investor Sentiment Affect Implied Risk-Neutral Distributions of Call and Put Options?

Wen-Ming Szu, Yi-Chen Wang and Wan-Ru Yang

Chapter 42 in Handbook of Financial Econometrics, Mathematics, Statistics, and Machine Learning:(In 4 Volumes), 2020, pp 1599-1636 from World Scientific Publishing Co. Pte. Ltd.

Abstract: This chapter investigates the characteristics of implied risk-neutral distributions derived separately from call and put options prices. Differences in risk-neutral moments between call and put options indicate deviations from put–call parity. We find that sentiment effect is significantly related to differences between call and put option prices. Our results suggest there is differential impact of investor sentiment and consumer sentiment on call and put option traders’ expectations. Rational and irrational sentiment components have different influence on call and put option traders’ beliefs as well.

Keywords: Financial Econometrics; Financial Mathematics; Financial Statistics; Financial Technology; Machine Learning; Covariance Regression; Cluster Effect; Option Bound; Dynamic Capital Budgeting; Big Data (search for similar items in EconPapers)
JEL-codes: C01 C1 G32 (search for similar items in EconPapers)
Date: 2020
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