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Belief distortion near 52W high and low: Evidence from Indian equity options market

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  • Sumit Saurav
  • Sobhesh Kumar Agarwalla
  • Jayanth R. Varma

Abstract

We examine investors' behavioral biases and preferences in the options market near 52‐week high and low (52W‐H/L) using Indian options market data. We document that as the stock price approaches 52W high (low), the skewness of risk‐neutral density (RND), and out‐of‐the‐money (OTM) call volume decreases (increases), while OTM put volume increases (decreases). After crossing the 52W high (low), the skewness of RND and OTM call volume increases (decreases), while OTM put volume decreases (increases). The effects are economically large and significant. Our findings provide evidence consistent with the anchoring theory of belief distortion near 52W‐H/L. There is no evidence of preference distortion, contrary to what prospect theory predicts.

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  • Sumit Saurav & Sobhesh Kumar Agarwalla & Jayanth R. Varma, 2023. "Belief distortion near 52W high and low: Evidence from Indian equity options market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(11), pages 1531-1558, November.
    • Handle: RePEc:wly:jfutmk:v:43:y:2023:i:11:p:1531-1558
    DOI: 10.1002/fut.22446
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