Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/149516
Authors: 
Stork, Philip
Félix, Luiz
Kräussl, Roman
Year of Publication: 
2017
Series/Report no.: 
Tinbergen Institute Discussion Paper 17-002/IV
Abstract: 
Low probability events are overweighted in the pricing of out-of-the-money index puts and single stock calls. This behavioral bias is strongly time-varying, and is linked to equity market sentiment and higher moments of the risk-neutral density. We _nd that our implied volatility (IV) sentiment measure, jointly derived from index and single stock options, explains investors' overweight of tail events well. When employed within a trading strategy, our IV-sentiment measure delivers economically signi_cant results, which are more consistent than the ones produced by the market sentiment factor. Out-of-sample tests on reversal prediction show that our IV-sentiment measure adds value over and above traditional factors in the equity risk premium literature.
Subjects: 
Sentiment
implied volatility skew
equity-risk premium
reversals
predictability
JEL: 
G12
G14
G17
Document Type: 
Working Paper

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