Abstract
The paper selects the transaction data of the option market and network data from June 1, 2015 to February 2, 2018. The principal component analysis is adopted to construct investor sentiment index. The OLS and MIDAS model are employed to study the influence of investor sentiment index on the option implied volatility in Shanghai Stock Exchange 50ETF. The empirical results show that the MIDAS model with more high-frequency information has stronger interpretation ability than the same frequency model. Investor sentiment index based on traditional indicators has a negative effect on the option implied volatility while the excessive attention of investors on the Internet would exert positive pressure on the option market. The conclusion can well explain the inherent mechanism of investor sentiment affecting option implied volatility. Therefore, it is of great practical significance to study the influence of investor sentiment on the option price volatility in China
Highlights
Investor sentiment is a kind of emotion formed by investors in view of their perception of various information
The OLS and MIDAS model are employed to study the influence of investor sentiment index on the option implied volatility in Shanghai Stock Exchange 50ETF
Investor sentiment index based on traditional indicators has a negative effect on the option implied volatility while the excessive attention of investors on the Internet would exert positive pressure on the option market
Summary
Investor sentiment is a kind of emotion formed by investors in view of their perception of various information. As an active representative in China’s financial market, the implied volatility of the option market is formed by the trading behavior of the market, and represents the expectation of investors for the future price volatility. It plays a very important guiding role in reflecting the pricing and optimization of options, the allocation of option assets and other regulatory policies. We collected information from posts and comments from China’s large investment social media Oriental Fortune by using web scraping technology, obtained the keywords by performing text analysis This procedure could measure the investor sentiment in a more comprehensively way. The paper constructed daily, weekly and monthly investor sentiment indexes, and the effects of mixed sentiment on the implied volatility of options can be studied on a more microscopic time scale
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