TY  - UNPD
A1  - Félix, Luiz
A1  - Kräussl, Roman
A1  - Stork, Philip
T1  - Single stock call options as lottery tickets
T2  - Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 566
N2  - This paper investigates whether the overpricing of out-of-the money single stock calls can be explained by Tversky and Kahneman’s (1992) cumulative prospect theory (CPT). We argue that these options are overpriced because investors overweight small probability events and overpay for such positively skewed securities, i.e., characteristics of lottery tickets. We match a set of subjective density functions derived from risk-neutral densities, including CPT with the empirical probability distribution of U.S. equity returns. We find that overweighting of small probabilities embedded in CPT explains on average the richness of out-of-the money single stock calls better than other utility functions. The degree that agents overweight small probability events is, however, strongly timevarying and has a horizon effect, which implies that it is less pronounced in options of longer maturity. We also find that time-variation in overweighting of small probabilities is strongly explained by market sentiment, as in Baker and Wurgler (2006).
T3  - CFS working paper series - 566 
KW  - Cumulative prospect theory
KW  - Market sentiment
KW  - Risk-neutral densities
KW  - Call options
Y1  - 2017
UR  - http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/42720
UR  - https://nbn-resolving.org/urn:nbn:de:hebis:30:3-427201
UR  - https://www.ifk-cfs.de/fileadmin/downloads/publications/wp/2016/CFS_WP_566.pdf
IS  - This version: February 2016
PB  - Center for Financial Studies
CY  - Frankfurt, M.
ER  -