Media Sentiment and the Cross-Section of Option Returns

with Ilias Filippou.

Abstract.

We examine the cross-sectional predictive ability of media pessimism for delta-hedged equity option returns. We find that a long-short portfolio that buys options of stocks with low media pessimism while going short options attached to high pessimism stocks, over the previous month, renders positive and statistically significant returns and alphas. Specifically, we find that delta-hedged options tend to be more overpriced when media pessimism is high. Our results are robust to the presence of transaction costs, different weighting schemes, different formation periods and cannot be explained by standard risk factor models.s..

Presented at:

University of Lugano* 2016, University of Exeter 2016

*Presented by co-authors

JEL Classification: G12, G13, G14, G23.