Investor sentiment and value and growth stock index options

Jerry Coakley, George Dotsis, Xianquan Liu, Jia Zhai

    Research output: Contribution to journalArticle

    5 Citations (Scopus)

    Abstract

    The paper examines the relationship between both individual and institutional investor sentiment measures and the risk-neutral skewness (RNS) of seven stock index options comprising either growth or value stocks. It provides novel evidence that growth index option prices are affected by sentiment measures. The regression results indicate a significantly positive relationship between sentiment measures and the RNS estimated from four growth index options and a negative relationship with two value index options. The results are economically significant since an associated long–short trading strategy yields high abnormal returns with a Sharpe ratio of up to 1.1 and zero exposure to systematic risk. These high abnormal returns provide evidence of a value premium type anomaly in the index options markets.
    LanguageEnglish
    PagesTBC-TBC
    JournalThe European Journal of Finance
    Volume19
    Issue numberTBC
    DOIs
    Publication statusPublished - 18 Apr 2013

    Fingerprint

    Growth stocks
    Index options
    Investor sentiment
    Value stocks
    Stock index
    Sentiment
    Abnormal returns
    Skewness
    Trading strategies
    Sharpe ratio
    Value premium
    Systematic risk
    Institutional investors
    Options markets
    Anomaly
    Option prices
    Individual investors

    Cite this

    Coakley, J., Dotsis, G., Liu, X., & Zhai, J. (2013). Investor sentiment and value and growth stock index options. 19(TBC), TBC-TBC. https://doi.org/10.1080/1351847X.2013.779290
    Coakley, Jerry ; Dotsis, George ; Liu, Xianquan ; Zhai, Jia. / Investor sentiment and value and growth stock index options. 2013 ; Vol. 19, No. TBC. pp. TBC-TBC.
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    abstract = "The paper examines the relationship between both individual and institutional investor sentiment measures and the risk-neutral skewness (RNS) of seven stock index options comprising either growth or value stocks. It provides novel evidence that growth index option prices are affected by sentiment measures. The regression results indicate a significantly positive relationship between sentiment measures and the RNS estimated from four growth index options and a negative relationship with two value index options. The results are economically significant since an associated long–short trading strategy yields high abnormal returns with a Sharpe ratio of up to 1.1 and zero exposure to systematic risk. These high abnormal returns provide evidence of a value premium type anomaly in the index options markets.",
    author = "Jerry Coakley and George Dotsis and Xianquan Liu and Jia Zhai",
    note = "Reference text: 1. Asquith, P., Pathak, P. A. and Ritter, J. R. 2005. Short Interest, Institutional Ownership, and Stock Returns. Journal of Financial Economics, 78: 243–276. (doi:10.1016/j.jfineco.2005.01.001) [CrossRef], [Web of Science {\circledR}] 2. Baker, M. and Wurgler, J. 2006. Investor sentiment and Cross-Section of Stock Returns. Journal of Finance, 61: 1645–1680. (doi:10.1111/j.1540-6261.2006.00885.x) [CrossRef], [Web of Science {\circledR}] 3. Bakshi, G., Kapadia, N. and Madan, D. 2003. Stock Return Characteristics, Skew Laws, and Differential Pricing of Individual Equity Options. Review of Financial Studies, 16: 101–143. (doi:10.1093/rfs/16.1.101) [CrossRef], [Web of Science {\circledR}] 4. Bali, T. G. and Hovakimian, A. 2009. Volatility Spreads and Expected Stork Returns. Management Science, 55: 1797–1812. (doi:10.1287/mnsc.1090.1063) [CrossRef] 5. Barberis, N., Shleifer, A. and Vishny, R. 1998. A Model of Investor Sentiment. Journal of Financial Economics, 49: 307–343. (doi:10.1016/S0304-405X(98)00027-0) [CrossRef], [Web of Science {\circledR}] 6. Birru, J. and Figlewski, S. 2011. Anatomy of a Meltdown: The Risk Neutral Density for the S&P 500 in the Fall of 2008. Journal of Financial Markets, 15: 151–180. (doi:10.1016/j.finmar.2011.09.001) [CrossRef] 7. Black, F. and Scholes, M. 1973. The Pricing of Options and Corporate Liabilities. Journal of Political Economy, 81: 637–645. (doi:10.1086/260062) [CrossRef], [Web of Science {\circledR}] 8. Blackburn, D. W., Goetzmann, W. N. and Ukhov, A. D. 2009. Risk Aversion and Clientele Effects. Working paper, NBER Working Paper No. 15333. 9. Bollen, N. P. and Whaley, R. E. 2004. Does Net Buying Pressure Affect the Shape of Implied Volatility Functions?. Journal of Finance, 59: 711–753. (doi:10.1111/j.1540-6261.2004.00647.x) [CrossRef], [Web of Science {\circledR}] 10. Carhart, M. 1997. On Persistence in Mutual Fund Performance. Journal of Finance, 52: 57–82. (doi:10.1111/j.1540-6261.1997.tb03808.x) [CrossRef], [Web of Science {\circledR}] 11. Conrad, J., Dittmar, R. and Ghysels, E. 2013. Ex Ante Skewness and Expected Stock Returns. Journal of Finance, 68: 85–124. (doi:10.1111/j.1540-6261.2012.01795.x) [CrossRef] 12. Constantinides, G. M., Jackwerth, J. C. and Perrakis, S. 2009. Mispricing of S&P 500 Index Options. Review of Financial Studies, 22: 1247–1277. (doi:10.1093/rfs/hhn009) [CrossRef] 13. Cremers, M. and Weinbaum, D. 2010. Deviations from Put-Call Parity and Stock Return Predictability. Journal of Financial and Quantitative Analysis, 45: 335–367. (doi:10.1017/S002210901000013X) [CrossRef] 14. Fama, E. and French, K. 1993. Common Risk Factors in the Returns on Stocks and Bonds. Journal of Financial Economics, 33: 3–56. (doi:10.1016/0304-405X(93)90023-5) [CrossRef], [Web of Science {\circledR}] 15. Garleanu, N., Pederson, L. H. and Poteshman, A. 2009. Demand-Based Option Pricing. Review of Financial Studies, 22: 4259–4299. (doi:10.1093/rfs/hhp005) [CrossRef] 16. Han, B. 2008. Investor Sentiment and Option Prices. Review of Financial Studies, 21: 387–414. (doi:10.1093/rfs/hhm071) [CrossRef], [Web of Science {\circledR}] 17. He, W., Lee, Y.-S. and Wei, P. 2010. Do Option Traders on Value and Growth Stocks React Differently to New Information. Review of Quantitative Finance and Accounting, 34: 371–381. (doi:10.1007/s11156-009-0134-y) [CrossRef] 18. Heston, S. 1993. A Closed-Form Solution of Options with Stochastic Volatility with Application to Bond and Currency Options. Review of Financial Studies, 6: 327–343. (doi:10.1093/rfs/6.2.327) [CrossRef], [Web of Science {\circledR}] 19. Hodrick, R. and Zhang, X. 2001. Evaluating the Specification Errors of Asset Pricing Models. Journal of Financial Economics, 62: 327–376. (doi:10.1016/S0304-405X(01)00080-0) [CrossRef], [Web of Science {\circledR}] 20. Jiang, G. and Tian, Y. S. 2005. The Model-Free Implied Volatility and its Information Content. Review of Financial Studies, 18: 1305–1342. (doi:10.1093/rfs/hhi027) [CrossRef], [Web of Science {\circledR}] 21. Kozhan, R., Neuberger, A. and Schneider, P. G. 2011. The Skew Risk Premium in Index Option Prices. SSRN eLibrary. 22. Lakonishok, J., Lee, I., Pearson, N. and Poteshman, A. 2007. Option Market Activity. Review of Financial Studies, 20: 813–857. (doi:10.1093/rfs/hhl025) [CrossRef], [Web of Science {\circledR}] 23. Lakonishok, J., Shleifer, A. and Vishny, R. 1994. Contrarian Investment, Extrapolation, and Risk. Journal of Finance, 49: 1541–1578. (doi:10.1111/j.1540-6261.1994.tb04772.x) [CrossRef], [Web of Science {\circledR}] 24. Lemmon, M. and Ni, X. 2010. The Effects of Investor Sentiment on Speculative Trading and Prices of Stock and Index Options. Working paper, University of Utah and Hong Kong University of Science and Technology. 25. Lemmon, M. and Portniaguina, E. 2006. Consumer Confidence and Asset Prices: Some Empirical Evidence. Review of Financial Studies, 19: 1499–1529. (doi:10.1093/rfs/hhj038) [CrossRef], [Web of Science {\circledR}] 26. Mahani, R. and Poteshman, A. 2008. Overreaction to Stock Market News and Misevaluation of Stock Prices by Unsophisticated Investors: Evidence from the Option Market. Journal of Empirical Finance, 15: 635–655. (doi:10.1016/j.jempfin.2007.11.001) [CrossRef], [Web of Science {\circledR}] 27. Newey, W. K. and West, K. D. 1987. A Simple Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimator. Econometrica, 55: 703–708. (doi:10.2307/1913610) [CrossRef], [Web of Science {\circledR}] 28. Poteshman, A. 2001. Underreaction, Overreaction, and Increasing Misreaction to Information in the Options Market. Journal of Finance, 56: 851–876. (doi:10.1111/0022-1082.00348) [CrossRef], [Web of Science {\circledR}] 29. Poteshman, A. and Serbin, V. 2003. Clearly Irrational Financial Market Behavior: Evidence From the Early Exercise of Exchange Traded Stock Options. Journal of Finance, 58: 37–70. (doi:10.1111/1540-6261.00518) [CrossRef], [Web of Science {\circledR}] 30. Rehman, Z. and Vilkov, G. 2010. “Risk-Neutral Skewness: Return Predictability and its Sources”. Goethe University. Working paper 31. Stambaugh, R. F., Yu, J. and Yuan, Y. 2012. The Short of It: Investor Sentiment and Anomalies. Journal of Financial Economics, 104: 288–302. (doi:10.1016/j.jfineco.2011.12.001) [CrossRef], [Web of Science {\circledR}] 32. Stein, J. 1989. Overreactions in the Options Market. Journal of Finance, 44: 1011–1023. (doi:10.1111/j.1540-6261.1989.tb02635.x) [CrossRef], [Web of Science {\circledR}] 33. Xing, Y., Zhang, X. and Zhao, R. 2010. What Does the Individual Option Volatility Smirk Tell Us About Future Equity Returns?. Journal of Financial and Quantitative Analysis, 45: 641–662. (doi:10.1017/S0022109010000220) [CrossRef]",
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    Coakley, J, Dotsis, G, Liu, X & Zhai, J 2013, 'Investor sentiment and value and growth stock index options', vol. 19, no. TBC, pp. TBC-TBC. https://doi.org/10.1080/1351847X.2013.779290

    Investor sentiment and value and growth stock index options. / Coakley, Jerry; Dotsis, George; Liu, Xianquan; Zhai, Jia.

    Vol. 19, No. TBC, 18.04.2013, p. TBC-TBC.

    Research output: Contribution to journalArticle

    TY - JOUR

    T1 - Investor sentiment and value and growth stock index options

    AU - Coakley, Jerry

    AU - Dotsis, George

    AU - Liu, Xianquan

    AU - Zhai, Jia

    N1 - Reference text: 1. Asquith, P., Pathak, P. A. and Ritter, J. R. 2005. Short Interest, Institutional Ownership, and Stock Returns. Journal of Financial Economics, 78: 243–276. (doi:10.1016/j.jfineco.2005.01.001) [CrossRef], [Web of Science ®] 2. Baker, M. and Wurgler, J. 2006. Investor sentiment and Cross-Section of Stock Returns. Journal of Finance, 61: 1645–1680. (doi:10.1111/j.1540-6261.2006.00885.x) [CrossRef], [Web of Science ®] 3. Bakshi, G., Kapadia, N. and Madan, D. 2003. Stock Return Characteristics, Skew Laws, and Differential Pricing of Individual Equity Options. Review of Financial Studies, 16: 101–143. (doi:10.1093/rfs/16.1.101) [CrossRef], [Web of Science ®] 4. Bali, T. G. and Hovakimian, A. 2009. Volatility Spreads and Expected Stork Returns. Management Science, 55: 1797–1812. (doi:10.1287/mnsc.1090.1063) [CrossRef] 5. Barberis, N., Shleifer, A. and Vishny, R. 1998. A Model of Investor Sentiment. Journal of Financial Economics, 49: 307–343. (doi:10.1016/S0304-405X(98)00027-0) [CrossRef], [Web of Science ®] 6. Birru, J. and Figlewski, S. 2011. Anatomy of a Meltdown: The Risk Neutral Density for the S&P 500 in the Fall of 2008. Journal of Financial Markets, 15: 151–180. (doi:10.1016/j.finmar.2011.09.001) [CrossRef] 7. Black, F. and Scholes, M. 1973. The Pricing of Options and Corporate Liabilities. Journal of Political Economy, 81: 637–645. (doi:10.1086/260062) [CrossRef], [Web of Science ®] 8. Blackburn, D. W., Goetzmann, W. N. and Ukhov, A. D. 2009. Risk Aversion and Clientele Effects. Working paper, NBER Working Paper No. 15333. 9. Bollen, N. P. and Whaley, R. E. 2004. Does Net Buying Pressure Affect the Shape of Implied Volatility Functions?. Journal of Finance, 59: 711–753. (doi:10.1111/j.1540-6261.2004.00647.x) [CrossRef], [Web of Science ®] 10. Carhart, M. 1997. On Persistence in Mutual Fund Performance. Journal of Finance, 52: 57–82. (doi:10.1111/j.1540-6261.1997.tb03808.x) [CrossRef], [Web of Science ®] 11. Conrad, J., Dittmar, R. and Ghysels, E. 2013. Ex Ante Skewness and Expected Stock Returns. Journal of Finance, 68: 85–124. (doi:10.1111/j.1540-6261.2012.01795.x) [CrossRef] 12. Constantinides, G. M., Jackwerth, J. C. and Perrakis, S. 2009. Mispricing of S&P 500 Index Options. Review of Financial Studies, 22: 1247–1277. (doi:10.1093/rfs/hhn009) [CrossRef] 13. Cremers, M. and Weinbaum, D. 2010. Deviations from Put-Call Parity and Stock Return Predictability. Journal of Financial and Quantitative Analysis, 45: 335–367. (doi:10.1017/S002210901000013X) [CrossRef] 14. Fama, E. and French, K. 1993. Common Risk Factors in the Returns on Stocks and Bonds. Journal of Financial Economics, 33: 3–56. (doi:10.1016/0304-405X(93)90023-5) [CrossRef], [Web of Science ®] 15. Garleanu, N., Pederson, L. H. and Poteshman, A. 2009. Demand-Based Option Pricing. Review of Financial Studies, 22: 4259–4299. (doi:10.1093/rfs/hhp005) [CrossRef] 16. Han, B. 2008. Investor Sentiment and Option Prices. Review of Financial Studies, 21: 387–414. (doi:10.1093/rfs/hhm071) [CrossRef], [Web of Science ®] 17. He, W., Lee, Y.-S. and Wei, P. 2010. Do Option Traders on Value and Growth Stocks React Differently to New Information. Review of Quantitative Finance and Accounting, 34: 371–381. (doi:10.1007/s11156-009-0134-y) [CrossRef] 18. Heston, S. 1993. A Closed-Form Solution of Options with Stochastic Volatility with Application to Bond and Currency Options. Review of Financial Studies, 6: 327–343. (doi:10.1093/rfs/6.2.327) [CrossRef], [Web of Science ®] 19. Hodrick, R. and Zhang, X. 2001. Evaluating the Specification Errors of Asset Pricing Models. Journal of Financial Economics, 62: 327–376. (doi:10.1016/S0304-405X(01)00080-0) [CrossRef], [Web of Science ®] 20. Jiang, G. and Tian, Y. S. 2005. The Model-Free Implied Volatility and its Information Content. Review of Financial Studies, 18: 1305–1342. (doi:10.1093/rfs/hhi027) [CrossRef], [Web of Science ®] 21. Kozhan, R., Neuberger, A. and Schneider, P. G. 2011. The Skew Risk Premium in Index Option Prices. SSRN eLibrary. 22. Lakonishok, J., Lee, I., Pearson, N. and Poteshman, A. 2007. Option Market Activity. Review of Financial Studies, 20: 813–857. (doi:10.1093/rfs/hhl025) [CrossRef], [Web of Science ®] 23. Lakonishok, J., Shleifer, A. and Vishny, R. 1994. Contrarian Investment, Extrapolation, and Risk. Journal of Finance, 49: 1541–1578. (doi:10.1111/j.1540-6261.1994.tb04772.x) [CrossRef], [Web of Science ®] 24. Lemmon, M. and Ni, X. 2010. The Effects of Investor Sentiment on Speculative Trading and Prices of Stock and Index Options. Working paper, University of Utah and Hong Kong University of Science and Technology. 25. Lemmon, M. and Portniaguina, E. 2006. Consumer Confidence and Asset Prices: Some Empirical Evidence. Review of Financial Studies, 19: 1499–1529. (doi:10.1093/rfs/hhj038) [CrossRef], [Web of Science ®] 26. Mahani, R. and Poteshman, A. 2008. Overreaction to Stock Market News and Misevaluation of Stock Prices by Unsophisticated Investors: Evidence from the Option Market. Journal of Empirical Finance, 15: 635–655. (doi:10.1016/j.jempfin.2007.11.001) [CrossRef], [Web of Science ®] 27. Newey, W. K. and West, K. D. 1987. A Simple Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimator. Econometrica, 55: 703–708. (doi:10.2307/1913610) [CrossRef], [Web of Science ®] 28. Poteshman, A. 2001. Underreaction, Overreaction, and Increasing Misreaction to Information in the Options Market. Journal of Finance, 56: 851–876. (doi:10.1111/0022-1082.00348) [CrossRef], [Web of Science ®] 29. Poteshman, A. and Serbin, V. 2003. Clearly Irrational Financial Market Behavior: Evidence From the Early Exercise of Exchange Traded Stock Options. Journal of Finance, 58: 37–70. (doi:10.1111/1540-6261.00518) [CrossRef], [Web of Science ®] 30. Rehman, Z. and Vilkov, G. 2010. “Risk-Neutral Skewness: Return Predictability and its Sources”. Goethe University. Working paper 31. Stambaugh, R. F., Yu, J. and Yuan, Y. 2012. The Short of It: Investor Sentiment and Anomalies. Journal of Financial Economics, 104: 288–302. (doi:10.1016/j.jfineco.2011.12.001) [CrossRef], [Web of Science ®] 32. Stein, J. 1989. Overreactions in the Options Market. Journal of Finance, 44: 1011–1023. (doi:10.1111/j.1540-6261.1989.tb02635.x) [CrossRef], [Web of Science ®] 33. Xing, Y., Zhang, X. and Zhao, R. 2010. What Does the Individual Option Volatility Smirk Tell Us About Future Equity Returns?. Journal of Financial and Quantitative Analysis, 45: 641–662. (doi:10.1017/S0022109010000220) [CrossRef]

    PY - 2013/4/18

    Y1 - 2013/4/18

    N2 - The paper examines the relationship between both individual and institutional investor sentiment measures and the risk-neutral skewness (RNS) of seven stock index options comprising either growth or value stocks. It provides novel evidence that growth index option prices are affected by sentiment measures. The regression results indicate a significantly positive relationship between sentiment measures and the RNS estimated from four growth index options and a negative relationship with two value index options. The results are economically significant since an associated long–short trading strategy yields high abnormal returns with a Sharpe ratio of up to 1.1 and zero exposure to systematic risk. These high abnormal returns provide evidence of a value premium type anomaly in the index options markets.

    AB - The paper examines the relationship between both individual and institutional investor sentiment measures and the risk-neutral skewness (RNS) of seven stock index options comprising either growth or value stocks. It provides novel evidence that growth index option prices are affected by sentiment measures. The regression results indicate a significantly positive relationship between sentiment measures and the RNS estimated from four growth index options and a negative relationship with two value index options. The results are economically significant since an associated long–short trading strategy yields high abnormal returns with a Sharpe ratio of up to 1.1 and zero exposure to systematic risk. These high abnormal returns provide evidence of a value premium type anomaly in the index options markets.

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    DO - 10.1080/1351847X.2013.779290

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