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Sophistication, Sentiment, and Misreaction

Author

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  • Chang, Chuang-Chang
  • Hsieh, Pei-Fang
  • Wang, Yaw-Huei

Abstract

This study investigates whether the existence or strength of any misreaction in the options market is affected by investor sophistication and investor sentiment. Based on a unique data set of the complete history of all transactions in the Taiwan options market, we find that individual investors exhibit significant misreaction to information and that this misreaction becomes stronger during periods of high investor sentiment. In addition, more active or aggressive individual investors always exhibit misreaction and do not learn from their past mistakes. Our empirical results are robust to alternative measures of investor sentiment and definitions of long- and short-term horizons.

Suggested Citation

  • Chang, Chuang-Chang & Hsieh, Pei-Fang & Wang, Yaw-Huei, 2015. "Sophistication, Sentiment, and Misreaction," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 50(4), pages 903-928, August.
    • Handle: RePEc:cup:jfinqa:v:50:y:2015:i:04:p:903-928_00
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    Citations

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    Cited by:

    1. Andres Algaba & David Ardia & Keven Bluteau & Samuel Borms & Kris Boudt, 2020. "Econometrics Meets Sentiment: An Overview Of Methodology And Applications," Journal of Economic Surveys, Wiley Blackwell, vol. 34(3), pages 512-547, July.
    2. Lin, William T. & Tsai, Shih-Chuan & Zheng, Zhenlong & Qiao, Shuai, 2018. "Retrieving aggregate information from option volume," International Review of Economics & Finance, Elsevier, vol. 55(C), pages 220-232.
    3. Ülkü, Numan & Ali, Fahad & Saydumarov, Saidgozi & İkizlerli, Deniz, 2023. "COVID caused a negative bubble. Who profited? Who lost? How stock markets changed?," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).
    4. Chen, Lemeng & Lazrak, Skander & Wang, Yan & Welch, Robert, 2019. "Pure momentum is priced," Journal of Behavioral and Experimental Finance, Elsevier, vol. 22(C), pages 75-89.
    5. Chin‐Ho Chen, 2021. "Investor sentiment, misreaction, and the skewness‐return relationship," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(9), pages 1427-1455, September.
    6. Karam KIM & Doojin RYU, 2020. "Predictive ability of investor sentiment for the stock market," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 33-46, December.
    7. Andreou, Panayiotis C. & Kagkadis, Anastasios & Philip, Dennis & Tuneshev, Ruslan, 2018. "Differences in options investors’ expectations and the cross-section of stock returns," Journal of Banking & Finance, Elsevier, vol. 94(C), pages 315-336.
    8. Kelley Bergsma & Andy Fodor & Vijay Singal & Jitendra Tayal, 2020. "Option trading after the opening bell and intraday stock return predictability," Financial Management, Financial Management Association International, vol. 49(3), pages 769-804, September.
    9. Ülkü, Numan & Rogers, Madeline, 2018. "Who drives the Monday effect?," Journal of Economic Behavior & Organization, Elsevier, vol. 148(C), pages 46-65.
    10. Fan Fang & Carmine Ventre & Michail Basios & Leslie Kanthan & David Martinez-Rego & Fan Wu & Lingbo Li, 2022. "Cryptocurrency trading: a comprehensive survey," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-59, December.
    11. Iyad SNUNU, 2024. "Mood Swings And The Firm Size Premium," Oradea Journal of Business and Economics, University of Oradea, Faculty of Economics, vol. 9(1), pages 165-176, March.
    12. Qadan, Mahmoud & Jacob, Maram, 2022. "The value premium and investors' appetite for risk," International Review of Economics & Finance, Elsevier, vol. 82(C), pages 194-219.
    13. Zhang, Hang & Tsai, Wei-Che & Weng, Pei-Shih & Tsai, Pin-Chieh, 2023. "Overnight returns and investor sentiment: Further evidence from the Taiwan stock market," Pacific-Basin Finance Journal, Elsevier, vol. 80(C).
    14. Fan Fang & Carmine Ventre & Michail Basios & Leslie Kanthan & Lingbo Li & David Martinez-Regoband & Fan Wu, 2020. "Cryptocurrency Trading: A Comprehensive Survey," Papers 2003.11352, arXiv.org, revised Jan 2022.

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