Single Stock Call Options as Lottery Tickets: Overpricing and Investor Sentiment

Luiz Félix, Roman Kräussl, Philip Stork

Research output: Contribution to JournalArticleAcademicpeer-review

Abstract

The authors investigate whether the overpricing of out-of-the money single stock calls can be explained by Tversky and Kahneman's [1992] cumulative prospect theory (CPT). They hypothesize that these options are expensive because investors overweight small probability events and overpay for positively skewed securities (i.e., lottery tickets). The authors find that overweighting of small probabilities embedded in the CPT explains the richness of out-of-the money single stock calls better than other utility functions. Nevertheless, overweighting of small probabilities events is less pronounced than suggested by the CPT, is strongly time varying, and most frequent in options of short maturity. The authors find that fluctuations in overweighting of small probabilities are largely explained by the sentiment factor.

Original languageEnglish
JournalJournal of Behavioral Finance
DOIs
Publication statusAccepted/In press - 1 Jan 2019

Fingerprint

Call option
Investor sentiment
Lottery
Cumulative prospect theory
Factors
Investors
Maturity
Fluctuations
Time-varying
Utility function
Sentiment

Keywords

  • Call options
  • Cumulative prospect theory
  • Investor sentiment
  • Risk-neutral densities

Cite this

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Single Stock Call Options as Lottery Tickets : Overpricing and Investor Sentiment. / Félix, Luiz; Kräussl, Roman; Stork, Philip.

In: Journal of Behavioral Finance, 01.01.2019.

Research output: Contribution to JournalArticleAcademicpeer-review

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