Chen, C. Y.-H. and Kuo, I.-D. (2014) Investor sentiment and interest rate volatility smile: evidence from Eurodollar options markets. Review of Quantitative Finance and Accounting, 43(2), pp. 367-391. (doi: 10.1007/s11156-013-0376-6)
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Abstract
This paper studies the extent to which investor sentiment affects the Eurodollar option smile and finds that there is the dynamic interplay between sentiment-driven investors and arbitrageurs. The results reveal a significant relation between investor sentiment and interest rate volatility smile. The significant relations are stronger for put options, for short-maturity options, and for periods with higher uncertainty. The results are robust when considering controlling variables, net buying pressure, different interest rate option models, model-free method, or excluding rational components from the sentiment measures. Our findings favor the limits to arbitrage hypothesis against the positive feedback hypothesis, suggesting that the sentiment effect is transitory. Change in investor sentiment explains the time-varying smile that can be explained neither by rational interest rate models nor by net buying pressure.
| Item Type: | Articles |
|---|---|
| Status: | Published |
| Refereed: | Yes |
| Glasgow Author(s) Enlighten ID: | Chen, Professor Cathy Yi-Hsuan |
| Authors: | Chen, C. Y.-H., and Kuo, I.-D. |
| College/School: | College of Social Sciences > Adam Smith Business School > Accounting and Finance |
| Journal Name: | Review of Quantitative Finance and Accounting |
| Publisher: | Springer US |
| ISSN: | 0924-865X |
| ISSN (Online): | 1573-7179 |
| Published Online: | 19 April 2013 |
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