TY  - UNPD
A1  - Félix, Luiz
A1  - Kräussl, Roman
A1  - Stork, Philip
T1  - Implied volatility sentiment: a tale of two tails
T2  - Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 565
N2  - Low probability events are overweighted in the pricing of out-of the-money index puts and single stock calls. We find that this behavioral bias is strongly time-varying, linked to equity market sentiment, and higher moments of the risk-neutral density. An implied volatility (IV) sentiment measure that is jointly derived from index and single stock options explains investors' overweight of tail events the best. Our findings also suggest that IV-sentiment predicts equity markets reversals better than overweight of small probabilities itself. When employed in a trading strategy, IV-sentiment delivers economically significant results, which are more consistent than the ones produced by the market sentiment factor. The joint use of information from the single stock and index option markets seems to explain the forecasting power of IV-sentiment. 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, especially as an equity-buying signal. This reversals prediction seems to improve time-series and cross-sectional momentum strategies.
T3  - CFS working paper series - 565 
KW  - sentiment
KW  - implied volatility skew
KW  - equity-risk premium
KW  - reversals
KW  - predictability
Y1  - 2017
UR  - http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/42719
UR  - https://nbn-resolving.org/urn:nbn:de:hebis:30:3-427191
UR  - https://www.ifk-cfs.de/fileadmin/downloads/publications/wp/2016/CFS_WP_565.pdf
IS  - January 2017
PB  - Center for Financial Studies
CY  - Frankfurt, M.
ER  -