Do investor sentiment, weather and catastrophe effects improve hedging performance? Evidence from the Taiwan options market

Chih Yuan Yang; Ling Jhen Jhang; Chia Chien Chang

doi:10.1016/j.pacfin.2016.03.002

Do investor sentiment, weather and catastrophe effects improve hedging performance? Evidence from the Taiwan options market

Chih Yuan Yang, Ling Jhen Jhang, Chia Chien Chang

Department of Civic Education and Leadership

Research output: Contribution to journal › Article › peer-review

6 Citations (Scopus)

Abstract

This study examines the usefulness of incorporating investor sentiment, weather, and catastrophe effects into the benchmark volatility model for an effective hedging strategy in the Taiwan options market. The empirical results indicate that investor sentiment, as measured by the option volatility index (VIX) and put-call open interest ratio (PCO), and the catastrophic factors of earthquakes (EQ) can help explain realized volatility and that the PCO has the best predictive ability. Incorporating investor sentiment and weather effects improves the hedging performance of options. VIX and changes in cloud cover (δCC) have significant improvement level for hedging performance, the highest of which are 0.44% and 5.36%, respectively.

Original language	English
Pages (from-to)	35-51
Number of pages	17
Journal	Pacific Basin Finance Journal
Volume	37
DOIs	https://doi.org/10.1016/j.pacfin.2016.03.002
Publication status	Published - 2016 Apr 1

Keywords

Catastrophe
Hedging performance
Investor sentiment
Taiwan options market
Weather

ASJC Scopus subject areas

Finance
Economics and Econometrics

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title = "Do investor sentiment, weather and catastrophe effects improve hedging performance? Evidence from the Taiwan options market",

abstract = "This study examines the usefulness of incorporating investor sentiment, weather, and catastrophe effects into the benchmark volatility model for an effective hedging strategy in the Taiwan options market. The empirical results indicate that investor sentiment, as measured by the option volatility index (VIX) and put-call open interest ratio (PCO), and the catastrophic factors of earthquakes (EQ) can help explain realized volatility and that the PCO has the best predictive ability. Incorporating investor sentiment and weather effects improves the hedging performance of options. VIX and changes in cloud cover (δCC) have significant improvement level for hedging performance, the highest of which are 0.44% and 5.36%, respectively.",

keywords = "Catastrophe, Hedging performance, Investor sentiment, Taiwan options market, Weather",

author = "Yang, {Chih Yuan} and Jhang, {Ling Jhen} and Chang, {Chia Chien}",

note = "Funding Information: This study is based on research funded by the Ministry of Science and Technology of Taiwan under grant #: 103-2410-H-151-004-MY2 . Publisher Copyright: {\textcopyright} 2016 Elsevier B.V.. Copyright: Copyright 2016 Elsevier B.V., All rights reserved.",

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AU - Yang, Chih Yuan

AU - Jhang, Ling Jhen

AU - Chang, Chia Chien

N1 - Funding Information: This study is based on research funded by the Ministry of Science and Technology of Taiwan under grant #: 103-2410-H-151-004-MY2 . Publisher Copyright: © 2016 Elsevier B.V.. Copyright: Copyright 2016 Elsevier B.V., All rights reserved.

PY - 2016/4/1

Y1 - 2016/4/1

N2 - This study examines the usefulness of incorporating investor sentiment, weather, and catastrophe effects into the benchmark volatility model for an effective hedging strategy in the Taiwan options market. The empirical results indicate that investor sentiment, as measured by the option volatility index (VIX) and put-call open interest ratio (PCO), and the catastrophic factors of earthquakes (EQ) can help explain realized volatility and that the PCO has the best predictive ability. Incorporating investor sentiment and weather effects improves the hedging performance of options. VIX and changes in cloud cover (δCC) have significant improvement level for hedging performance, the highest of which are 0.44% and 5.36%, respectively.

AB - This study examines the usefulness of incorporating investor sentiment, weather, and catastrophe effects into the benchmark volatility model for an effective hedging strategy in the Taiwan options market. The empirical results indicate that investor sentiment, as measured by the option volatility index (VIX) and put-call open interest ratio (PCO), and the catastrophic factors of earthquakes (EQ) can help explain realized volatility and that the PCO has the best predictive ability. Incorporating investor sentiment and weather effects improves the hedging performance of options. VIX and changes in cloud cover (δCC) have significant improvement level for hedging performance, the highest of which are 0.44% and 5.36%, respectively.

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KW - Hedging performance

KW - Investor sentiment

KW - Taiwan options market

KW - Weather

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Do investor sentiment, weather and catastrophe effects improve hedging performance? Evidence from the Taiwan options market

Abstract

Keywords

ASJC Scopus subject areas

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