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Limits Of Arbitrage, Risk-Neutral Skewness, And Investor Sentiment

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  • Shih-Ping Feng
  • Bi-Juan Chang

Abstract

This paper uses individual stock options to examine the effect of limits of arbitrage on the relations between risk-neutral skewness and investor sentiment for the underlying stocks. Empirical results show that the riskneutral skewness tends to be more (less) negative under bearish (bullish) investor sentiment, and the significant relations become stronger especially when there are more impediments to arbitrage in stock options. In addition, the empirical results show that increased bearishness among market investors who dominate the use of index options increases the extent to which risk-neutral skewness is affected by fluctuations in investor sentiment for the underlying stocks. Empirical results show that the limits of arbitrage have important implications for the role of investor sentiment in explaining risk-neutral skewness

Suggested Citation

  • Shih-Ping Feng & Bi-Juan Chang, 2020. "Limits Of Arbitrage, Risk-Neutral Skewness, And Investor Sentiment," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 14(2), pages 61-71.
    • Handle: RePEc:ibf:ijbfre:v:14:y:2020:i:2:p:61-71
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Risk-Neutral Skewness; Investor Sentiment; Limits of Arbitrage;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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