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Option pricing model with sentiment

Author

Listed:
  • Chunpeng Yang

    (South China University of Technology)

  • Bin Gao

    (South China University of Technology)

  • Jianlei Yang

    (Hebei University of Technology)

Abstract

In this paper, we develop a closed-form option pricing model with the stock sentiment and option sentiment. First, the model shows that the price of call option is amplified by bullish stock sentiment, and is reduced by stock bearish sentiment, and the price of put option is in the opposite situation. Second, the price of call option is more sensitive to bullish stock sentiment; the price of put option is more sensitive to bearish stock sentiment. Third, the price of call option increases substantially with respect to the stock sentiment and the option sentiment. The price of put option decreases substantially with respect to the stock sentiment, increases substantially with respect to the option sentiment. Fourth, our models also reveal that the option volatility smile is steeper (flatter) when the stock sentiment becomes more bearish (bullish). Finally, stock sentiment and option sentiment lead to the option price deviating from the rational price. The model could offer a partial explanation of some option anomalies: option price bubbles and option volatility smile.

Suggested Citation

  • Chunpeng Yang & Bin Gao & Jianlei Yang, 2016. "Option pricing model with sentiment," Review of Derivatives Research, Springer, vol. 19(2), pages 147-164, July.
    • Handle: RePEc:kap:revdev:v:19:y:2016:i:2:d:10.1007_s11147-015-9118-3
    DOI: 10.1007/s11147-015-9118-3
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    References listed on IDEAS

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    More about this item

    Keywords

    Stock sentiment; Option sentiment; Option pricing model; Option price bubbles; Option volatility smile;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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