Open Access Journal Article

Aggregate Investor Sentiment and Time-Varying Price Discovery: Evidence from the Options Market

by Yaping Zhou a  and  Dayong Lv b,* orcid
a
Antai College of Economics and Management, Shanghai Jiao Tong University, Shanghai, China
b
School of Financial Technology, Shanghai Lixin University of Accounting and Finance, Shanghai, China
*
Author to whom correspondence should be addressed.
EAL  2023, 19; 2(2), 19; https://doi.org/10.58567/eal02020001
Received: 10 March 2023 / Accepted: 11 May 2023 / Published Online: 13 May 2023
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Abstract

Previous literature shows that the price-discovery ability of options market varies substantially over time. Using data of Shanghai Stock Exchange 50 exchange-traded fund options, this paper shows that options prices contribute relatively less to price discovery during low-sentiment periods, but the price-discovery ability of options market remains unchanged during high-sentiment periods. These results suggest that change in aggregate investor sentiment is an important source of the time variation in options’ price discovery ability. Moreover, the options market experiences greater bid-ask spreads when investor sentiment is lower, supporting a “transaction costs mechanism.” This paper fulfills related literature on the time variation in options’ price-discovery ability.

Keywords: Aggregate investor sentiment; price discovery; options market; China;
Copyright: © 2023 by Zhou and Lv. This is an open-access article distributed under the terms of the Creative Commons Attribution License (CC BY) (Creative Commons Attribution 4.0 International License). The use, distribution or reproduction in other forums is permitted, provided the original author(s) or licensor are credited and that the original publication in this journal is cited, in accordance with accepted academic practice. No use, distribution or reproduction is permitted which does not comply with these terms.

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ACS Style
Zhou, Y.; Lv, D. Aggregate Investor Sentiment and Time-Varying Price Discovery: Evidence from the Options Market. Economic Analysis Letters, 2023, 2, 19. https://doi.org/10.58567/eal02020001
AMA Style
Zhou Y, Lv D. Aggregate Investor Sentiment and Time-Varying Price Discovery: Evidence from the Options Market. Economic Analysis Letters; 2023, 2(2):19. https://doi.org/10.58567/eal02020001
Chicago/Turabian Style
Zhou, Yaping; Lv, Dayong 2023. "Aggregate Investor Sentiment and Time-Varying Price Discovery: Evidence from the Options Market" Economic Analysis Letters 2, no.2:19. https://doi.org/10.58567/eal02020001
APA style
Zhou, Y., & Lv, D. (2023). Aggregate Investor Sentiment and Time-Varying Price Discovery: Evidence from the Options Market. Economic Analysis Letters, 2(2), 19. https://doi.org/10.58567/eal02020001

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