Investor sentiment, variance risk premium and delta-hedged gains. Issue 31 (2nd July 2016)

• Record Type: Journal Article
• Authors: Chen, Yankun; Shu, Jinghong; Zhang, Jin E.
• Is Part Of: Applied economics. Volume 48:Issue 31(2016)
• Page Start: 2952
• Page End: 2964
• Publication Date: 2016-07-02
• Subjects: Investor sentiment -- variance risk premium -- delta-hedged gains; G12 -- G13; Economics -- Periodicals; 330
• DOI: 10.1080/00036846.2015.1133894
• Languages: English
• ISSNs: 0003-6846

Abstract

ABSTRACT: Delta-hedged gains are supposed to be negative and represent a volatility risk premium. Using a sample of Standard & Poor 500 index options from 2006 to 2009, this study documents two anomalies that cannot be explained by the volatility risk premium. First, delta-hedged gains are more negative for out-of-money options than for at-the-money options. Second, delta-hedged gains are significantly positive during financial crisis period. We propose a behavioural explanation in which both option prices and stock prices are affected by investor's sentiment, but pessimistic sentiment has a greater impact on stock market than option market. This asymmetric response to pessimistic mood in turn affects the relative expensiveness of option prices.