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Investor sentiment, variance risk premium and delta-hedged gains

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  • Yankun Chen
  • Jinghong Shu
  • Jin E. Zhang

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.

Suggested Citation

  • Yankun Chen & Jinghong Shu & Jin E. Zhang, 2016. "Investor sentiment, variance risk premium and delta-hedged gains," Applied Economics, Taylor & Francis Journals, vol. 48(31), pages 2952-2964, July.
    • Handle: RePEc:taf:applec:v:48:y:2016:i:31:p:2952-2964
    DOI: 10.1080/00036846.2015.1133894
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    Cited by:

    1. Wu, Lingke & Liu, Dehong & Yuan, Jianglei & Huang, Zhenhuan, 2022. "Implied volatility information of Chinese SSE 50 ETF options," International Review of Economics & Finance, Elsevier, vol. 82(C), pages 609-624.
    2. Ryu, Doojin & Ryu, Doowon & Yang, Heejin, 2023. "Whose sentiment explains implied volatility change and smile?," Finance Research Letters, Elsevier, vol. 55(PA).
    3. Shvimer, Yossi & Herbon, Avi, 2020. "Comparative empirical study of binomial call-option pricing methods using S&P 500 index data," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    4. Jungah Yoon & Xinfeng Ruan & Jin E. Zhang, 2022. "VIX option‐implied volatility slope and VIX futures returns," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(6), pages 1002-1038, June.
    5. Huang, Darien & Schlag, Christian & Shaliastovich, Ivan & Thimme, Julian, 2018. "Volatility-of-volatility risk," SAFE Working Paper Series 210, Leibniz Institute for Financial Research SAFE.

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