Economics at your fingertips  

Single Stock Call Options as Lottery Tickets - Overpricing and Investor Sentiment

Luiz Felix, Roman Kräussl () and Philip Stork ()
Additional contact information
Luiz Felix: VU University Amsterdam, the Netherlands

No 16-022/IV, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: This paper investigates whether the overpricing of out-of-the money single stock calls can be explained by Tversky and Kahneman's (1992) cumulative prospect theory (CPT). We hypothesize that these options are overpriced because investors overweight small probability events and overpay for positively skewed securities, i.e, lottery tickets. We find that overweighting of small probabilities embedded in the CPT explains the richness of out-of-the money single stock calls better than other utility functions. Nevertheless, overweighting of small probabilities events is less pronounced than suggested by the CPT, is strongly time-varying and most frequent in options of short maturity. Fluctuations in overweighting of small probabilities are largely explained by the sentiment factor.

Keywords: Cumulative prospect theory; Market sentimen; Risk-neutral densities; Call options (search for similar items in EconPapers)
JEL-codes: G02 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-upt
Date: 2016-04-01, Revised 2018-01-26
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link) (application/pdf)

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:

Access Statistics for this paper

More papers in Tinbergen Institute Discussion Papers from Tinbergen Institute Contact information at EDIRC.
Bibliographic data for series maintained by Tinbergen Office +31 (0)10-4088900 ().

Page updated 2019-11-26
Handle: RePEc:tin:wpaper:20160022