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Sentiment, Risk Aversion, and Time Preference


  • Giovanni Barone-Adesi

    (University of Lugano, Ecole Polytechnique Fédérale de Lausanne, and Swiss Finance Institute)

  • Loriano Mancini

    (Ecole Polytechnique Fédérale de Lausanne and Swiss Finance Institute)

  • Hersh Shefrin

    (Santa Clara University)


We estimate aggregate preferences, beliefs, and sentiment from option prices and historical returns. Our market-based estimates correlate well with independent survey-based estimates, and yet provide a number of novel insights. Our analysis points out two significant issues related to overconfidence. First, the Baker--Wurgler index strongly reflects excessive optimism but not overconfidence. Second, optimism and overconfidence comove over time and generate a perceived negative risk-return relationship, while objectively the relationship is positive. The appendices for this paper are available at the following URL:

Suggested Citation

  • Giovanni Barone-Adesi & Loriano Mancini & Hersh Shefrin, 2012. "Sentiment, Risk Aversion, and Time Preference," Swiss Finance Institute Research Paper Series 12-21, Swiss Finance Institute.
  • Handle: RePEc:chf:rpseri:rp1221

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    Sentiment; Pricing Kernel; Optimism; Overconfidence; Option Data;
    All these keywords.

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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