Investor Sentiment Index and Option Price Volatility Based on MIDAS Model: Evidence from China

Abstract

The paper selects the transaction data of the option market and network data from June 1, 2015 to February 2, 2018. The principal component analysis is adopted to construct investor sentiment index. The OLS and MIDAS model are employed to study the influence of investor sentiment index on the option implied volatility in Shanghai Stock Exchange 50ETF. The empirical results show that the MIDAS model with more high-frequency information has stronger interpretation ability than the same frequency model. Investor sentiment index based on traditional indicators has a negative effect on the option implied volatility while the excessive attention of investors on the Internet would exert positive pressure on the option market. The conclusion can well explain the inherent mechanism of investor sentiment affecting option implied volatility. Therefore, it is of great practical significance to study the influence of investor sentiment on the option price volatility in China