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Sophistication, Sentiment, and Misreaction

Published online by Cambridge University Press:  27 October 2015

Chuang-Chang Chang ,
Pei-Fang Hsieh  and
Yaw-Huei Wang
Chuang-Chang Chang
Affiliation:
[email protected], National Central University, Department of Finance, Taiwan
Pei-Fang Hsieh*
Affiliation:
[email protected], Department of Quantitative Finance, National Tsing Hua University, Taiwan
Yaw-Huei Wang
Affiliation:
[email protected], Department of Finance, National Taiwan University, Taipei, Taiwan.
*
*Corresponding author: [email protected]
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Abstract

This study investigates whether the existence or strength of any misreaction in the options market is affected by investor sophistication and investor sentiment. Based on a unique data set of the complete history of all transactions in the Taiwan options market, we find that individual investors exhibit significant misreaction to information and that this misreaction becomes stronger during periods of high investor sentiment. In addition, more active or aggressive individual investors always exhibit misreaction and do not learn from their past mistakes. Our empirical results are robust to alternative measures of investor sentiment and definitions of long- and short-term horizons.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 50 , Issue 4 , August 2015 , pp. 903 - 928
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2015 

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