TY - JOUR
T1 - Single Stock Call Options as Lottery Tickets
T2 - Overpricing and Investor Sentiment
AU - Félix, Luiz
AU - Kräussl, Roman
AU - Stork, Philip
PY - 2019
Y1 - 2019
N2 - 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.
AB - 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.
KW - Call options
KW - Cumulative prospect theory
KW - Investor sentiment
KW - Risk-neutral densities
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U2 - 10.1080/15427560.2018.1511792
DO - 10.1080/15427560.2018.1511792
M3 - Article
AN - SCOPUS:85060633375
VL - 20
SP - 385
EP - 407
JO - Journal of Behavioral Finance
JF - Journal of Behavioral Finance
SN - 1542-7560
IS - 4
ER -