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

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Název: Firm-specific sentiment and individual option's implied volatility slope
Autoři: Bei Chen, Quan Gan
Zdroj: Review of Behavioral Finance. 15:672-693
Informace o vydavateli: Emerald, 2022.
Rok vydání: 2022
Témata: 0502 economics and business, 05 social sciences, 0401 agriculture, forestry, and fisheries, 04 agricultural and veterinary sciences
Popis: PurposePrevious 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/approachThe 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.FindingsWhen 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/valueAlthough 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.
Druh dokumentu: Article
Jazyk: English
ISSN: 1940-5979
DOI: 10.1108/rbf-10-2021-0216
Rights: Emerald Insight Site Policies
Přístupové číslo: edsair.doi...........57f224fe5c07e4aaca7e12239edfaab6
Databáze: OpenAIRE
Popis
Abstrakt:PurposePrevious 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/approachThe 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.FindingsWhen 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/valueAlthough 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.
ISSN:19405979
DOI:10.1108/rbf-10-2021-0216