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Whose sentiment explains implied volatility change and smile?

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  • Ryu, Doojin
  • Ryu, Doowon
  • Yang, Heejin

Abstract

This letter examines the relationship between investor sentiment and options-implied volatility (IV) dynamics using a high-quality intraday dataset. By classifying each trade by investor type and moneyness, we find that sentiment affects intraday IV changes and explains IV structures and anomalies. Domestic individuals’ sentiment is highly related to implied volatility changes and has a more significant effect on out-of-the-money options that noisy individual investors heavily trade.

Suggested Citation

  • Ryu, Doojin & Ryu, Doowon & Yang, Heejin, 2023. "Whose sentiment explains implied volatility change and smile?," Finance Research Letters, Elsevier, vol. 55(PA).
    • Handle: RePEc:eee:finlet:v:55:y:2023:i:pa:s1544612323002118
    DOI: 10.1016/j.frl.2023.103838
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    References listed on IDEAS

    as
    1. Chen, Jing & Han, Qian & Ryu, Doojin & Tang, Jing, 2022. "Does the world smile together? A network analysis of global index option implied volatilities," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 77(C).
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    4. Doojin Ryu & Doowon Ryu & Heejin Yang, 2021. "The impact of net buying pressure on index options prices," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(1), pages 27-45, January.
    5. Deeney, Peter & Cummins, Mark & Dowling, Michael & Bermingham, Adam, 2015. "Sentiment in oil markets," International Review of Financial Analysis, Elsevier, vol. 39(C), pages 179-185.
    6. Hee‐Joon Ahn & Jangkoo Kang & Doojin Ryu, 2008. "Informed trading in the index option market: The case of KOSPI 200 options," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 28(12), pages 1118-1146, December.
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    13. Chunpeng Yang & Bin Gao & Jianlei Yang, 2016. "Option pricing model with sentiment," Review of Derivatives Research, Springer, vol. 19(2), pages 147-164, July.
    14. Doojin Ryu, 2011. "Intraday price formation and bid–ask spread components: A new approach using a cross‐market model," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 31(12), pages 1142-1169, December.
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    16. Lee, Jaeram & Ryu, Doojin & Yang, Heejin, 2021. "Does vega-neutral options trading contain information?," Journal of Empirical Finance, Elsevier, vol. 62(C), pages 294-314.
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    Cited by:

    1. Jinyoung Yu & Young‐Chul Kim & Doojin Ryu, 2024. "Left‐digit biases: Individual and institutional investors," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 44(3), pages 518-532, March.

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    More about this item

    Keywords

    Implied volatility; Individual investor; Intraday data; Sentiment; Volatility smile;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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