The frame dependence theory proposed by Shefrin (2000, 2005) in behavioral finance argues that investors‟ sentiments and decisions are sensitive to different market scenarios. In contrast to the previous studies which respectively emphasize on the relationship between investor sentiment and stock market returns, volatility and market index, or volatility forecasting considering the stock market return, this study investigates the interaction among implied volatility, investor sentiment and market index from the behavioral finance point of view in the emerging Taiwan equity market.
The dissertation investigates the nonlinear co-movement and causalities between the implied volatility, investor sentiment and market index from different dimensions.
We propose that the options trading strategy constructed based on the volatility direction forecasting incorporating the investor sentiment outperforms the alternative models. Our results reveal that the property of investor sentiment which could capture the overreaction in the stock market should be considered in the volatility forecasting, portfolio management and options trading strategy.
In summary, the essays of this dissertation provide some insights into the information content of investor sentiment, emphasize on the nonlinear relationship between sentiment, implied volatility and the market index and the improvement of volatility forecasting by incorporating sentiment proxies. Future research could further investigate the volatility forecasting incorporating the asymmetry of investor sentiment and apply the findings to the actual trading strategies.
References
Andersen, T. G., and Bollerslev, T. (1998). Answering the Skeptics: Yes, Standard Volatility Models Do Provide Accurate Forecasts. International Economic
Review, 39, 885-905.
Arms, R. W. (1989). The Arms Index (TRIN): An introduction to the volume analysis
of stock and bond markets. McGraw-Hill Companies.
Awartani, B. M. A., and Corradi, V. (2005). Predicting the Volatility of the S&P-500 Stock Index via GARCH Models: The Role of Asymmetries. International
Journal of Forecasting, 21, 167-183.
Baker, M., and Stein, J. C. (2004). Market Liquidity as a Sentiment Indicator. Journal
of Financial Markets, 7, 271-299.
Baker, M., and Wurgler, J. (2006). Investor Sentiment and the Cross-Section of Stock Returns. Journal of Finance, 61, 1645-1680.
Baker, M., and Wurgler, J. (2007). Investor Sentiment in the Stock Market. Journal of
Economic Perspectives, 21, 129-151.
Balke, N. S., and Fomby, T. B. (1997). Threshold Cointegration. International
Economic Review, 38, 627-645.
Banerjee, P. S., Doran, J. S., and Peterson, D. R. (2007). Implied Volatility and Future Portfolio Returns. Journal of Banking & Finance, 31, 3183-3199.
Barberis, N., Shleifer, A., and Vishny, R. (1998). A Model of Investor Sentiment.
Journal of Financial Economics, 49, 307-343.
Barndorff-Nielsen, O.E., and Shephard, N. (2002). Econometric Analysis of Realized Volatility and Its Use in Estimating Stochastic Volatility Models. Journal of the
Royal Statistical Society, 64, 253-280.
Bauer, R., Cosemans, M., and Eichholtz, P. (2009). Option Trading and Individual Investor Performance. Journal of Banking & Finance, 33, 731-746.
Beckers, S. (1981). Standard Deviations Implied in Options Prices as Predictors of Future Stock Price Variability. Journal of Banking and Finance, 5, 363-381.
Becker, R., Clements, A. E., and White, S. I. (2007). Does Implied Volatility Provide Any Information beyond That Captured in Model-Based Volatility Forecasts?
Journal of Banking and Finance, 31, 2535-2549.
Becker, R., and Clements, A. E. (2008). Are Combination Forecasts of S&P 500 Volatility Statistically Superior? International Journal of Forecasting, 24, 122-133.
Black, B. (1976). Studies of Stock Price Volatility Changes. Proceedings of the 1976
Meetings of the American Statistical Association, Business and Economic Statistics, 177-181.
Blair, B., Poon, S. H., and Taylor, S. J. (2001). Forecasting S&P 100 Volatility: The Incremental Information Content of Implied Volatilities and High Frequency Index Returns. Journal of Econometrics, 105, 5-26.
Bollerslev, T. (1986). Generalized Autoregressive Conditional Heteroscedasticity.
Journal of Econometrics, 31, 307-327.
Bollerslev, T., Litvinova, J., and Tauchen, G. (2006). Leverage and Volatility Feedback Effects in High-Frequency Data. Journal of Financial Econometrics, 4, 353-384.
Brown, G. W. (1999). Volatility, Sentiment, and Noise Traders. Financial Analysts
Journal, 55, 82-90.
Brown, G. W., and Cliff, M. T. (2004). Investor Sentiment and the Near-term Stock Market. Journal of Empirical Finance, 11, 1-27.
Campbell, J. Y., Grossman, S. J., and Wang, J. (1993). Trading Volume and Serial Correlation in Stock Returns. Quarterly Journal of Economics, 108, 905-939.
Chan, K. S. (1993). Consistentency and Limiting Distribution of the Least Squares Estimator of a Threshold Autoregressive Model. Annals of Statistics, 21, 520-533.
Chiras, D. P., and Manaster, S. (1978). The Information Content of Options Prices and a Test of Market Efficiency. Journal of Financial Economics, 6, 213-234.
Clarke, R. G., and Statman, M. (1998). Bullish or Bearish. Financial Analysts Journal, 54, 63-72.
Cooper, M. (1999). Filter Rules Based on Price and Volume in Individual Security Overreaction. The Review of Financial Studies, 12, 901-935.
Copeland, M. M., and Copeland, T. E. (1999). Market Timing: Style and Size Rotation Using the VIX. Financial Analysts Journal, 55, 73-81.
Corrado, C. J., and Miller, T. W. (2005). The Forecast Quality of CBOE Implied Volatility Indexes. The Journal of Futures Markets, 25, 339-373.
De Long, J. B., Shleifer, A., Summers, L. G., and Waldmann, R. J. (1990). Noise Trader Risk in Financial Markets. Journal of Political Economy, 98, 703-738.
Enders, W., and Granger, C. W. J. (1998). Unit-Root Tests and Asymmetric Adjustment with an Example Using the Term Structure of Interest Rates. Journal
of Business and Economic Statistics, 16, 304-311.
Engle, R. F. (1982). Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation. Econometrica, 50, 987-1007.
Engle, R. F., and Gallo, G. M. (2006). A Multiple-indicators Model for Volatility Using Intra-daily Data. Journal of Econometrics, 131, 3-27.
Engle, R. F., Hong, C., Kane, A., and Noh, J. (1993). Arbitrage Valuation of Variance Forecasts with Simulated Options. In Advances in Futures and Options Research, Chance D.M., Trippi R.R. (eds). JAI Press: Greenwich, CT.
Engle, R. F., and Granger, C. W. J. (1987). Cointegration and Error Correction:
Representation, Estimation, and Testing. Econometrica, 55, 251-276.
Fama, E. F. (1965). The Behavior of Stock Market Prices. Journal of Business, 38, 34-105.
Fisher, K. L., and Statman, M. (2000). Investor Sentiment and Stock Returns.
Financial Analysts Journal, 56, 16-23.
Fleming, J., Ostdiek, B., and Whaley, R. E. (1995). Predicting Stock Market Volatility:
A New Measure. Journal of Futures Markets, 15, 265-302.
French, K. R., Schwert, G. W., and Stambaugh, R. F. (1987).Expected Stock Returns and Volatility. Journal of Financial Economics, 19, 3-30.
Friedman, M. (1953). The Case for Flexible Exchange Rate. Essays in Positive
Economics, Chicago: Univ. Chicago Press.
Gervais, S., Kaniel, R., and Mingelgrin, D. H. (2001). The High-Volume Return Premium. The Journal of Finance, 56, 877-919.
Giot, P. (2005). Relationships between Implied Volatility Indexes and Stock Index Returns. Journal of Portfolio Management, 31, 92-100.
Gospodinov, N., Gavala, A., and Jiang, D. (2006). Forecasting Volatility. Journal of
Forecasting, 25, 381-400.
Granger, C. W. J. (1969). Investigating Causal Relations by Econometric Models and Cross-Spectral Methods. Econometrica, 37, 424–38.
Granger, C. W. J. (1988). Some Recent Developments in a Concept of Causality.
Journal of Econometrics, 39, 199-211.
Han, B. (2008). Investor Sentiment and Option Prices. The Review of Financial
Studies, 21, 387-414.
Hansen, B. E., and Seo, B. (2002). Testing for Two-Regime Threshold Cointegration in Vector Error-Correction Models. Journal of Econometrics, 110, 293-318.
Hsieh, W. L., Lee, C. S., and Yuan, S. F. (2006). The Construction of the Volatility Index for the Taiwan Stock Market: An Analysis of the Information Contents and Trading Strategies. Journal of Management Systems, 13, 471-497.
Hull, J. C., (2006). Options, Futures, and Other Derivatives. 6th Edition, Prentice Hall.
Johansen, S. (1991). Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models. Econometrica, 59, 1551-1580.
Kahneman, D., and Tversky, A. (1979). Prospect Theory: An Analysis of Decision under Risk. Econometrica, 47, 263-292.
Koopman, S. J., Jungbacker, B., and Hol, E. (2005). Forecasting Daily Variability of the S&P 100 Stock Index Using Historical, Realized and Implied Volatility Measurements. Journal of Empirical Finance, 12, 445-475.
Latané, H. A., and Rendleman, R. J. (1976). Standard Deviations of Stock Price Ratios Implied in Options Prices. Journal of Finance, 31, 369-381.
Lee, T. S., Lu, C. Y., and Chiang, M. W. (2005). The Information Content of the Volatility Index Implied by TAIEX Index Options. Review of Securities &
Futures Markets, 17, 1-42.
Lee, W. Y., Jiang, C. X., and Indro, D. C. (2002). Stock Market Volatility, Excess Returns, and the Role of Investor Sentiment. Journal of Banking & Finance, 26, 2277-2299.
Li, S. T., and Kuo, S. C. (2008). Knowledge Discovery in Financial Investment for Forecasting and Trading Strategy through Wavelet-Based SOM Networks.
Expert Systems with Applications, 34, 935-951.
Low, C. (2004). The Fear and Exuberance from Implied Volatility of S&P 100 Index Options. The Journal of Business, 77, 527-546.
Markowitz, H. (1952). Portfolio Selection. The Journal of Finance, 7, 77-91.
Montier, J. (2002). Behavioural Finance, John Wiley & Sons, Chichester.
Obstfeld, M., and Taylor, A. M. (1997). Non-linear Aspects of Goods-Market Arbitrage and Adjustment: Heckscher‟s Commodity Points Revisited. Journal of
Japanese and International Economics, 11, 441-479.
Olsen, R. A. (1998). Behavioral Finance and Its Implications for Stock-Price Volatility.
Financial Analysts Journal, 54, 10-18.
Poon, S. H., and Granger, C. W. J. (2003). Forecasting Volatility in Financial Markets:
A review. Journal of Economic Literature, 41, 478-539.
Poon, S. H., and Granger, C. (2005). Practical Issues in Forecasting Volatility.
Financial Analysts Journal, 61, 45-56.
Rada, R. (2008). Expert Systems and Evolutionary Computing for Financial Investing:
A review. Expert Systems with Applications, 34, 2232-2240.
Scheinkman, J., and Xiong, W. (2003). Overconfidence and Speculative Bubbles.
Journal of Political Economy, 111, 1183-1219.
Seo, B. (2003). Nonlinear Mean Reversion in the Term Structure of Interest Rates.
Journal of Economic Dynamics and Control, 27, 2243-2265.
Serra, T., and Goodwin, B. K. (2002). Price Transmission and Asymmetric Adjustment in the Spanish Dairy Sector. Applied Economics, 35, 1189-1199.
Shefrin, H. (2000). Beyond Greed and Fear. Harvard Business School Press, Boston.
Shefrin, H. (2005). A Behavioral Approach to Asset Pricing. Elsevier Academic Press.
Shefrin, H. (2007). Beyond Greed and Fear. Oxford University Press.
Simon, D. P., and Wiggins, R. A. (2001). S&P Futures Returns and Contrary Sentiment Indicators. The Journal of Futures Markets, 21, 447-462.
Sims, C.A. (1972). Money, Income, and Causality. American Economic Review, 62, 540-552.
Solt, M. E., and Statman, M. (1988). How Useful Is the Sentiment Index? Financial
Analysts Journal, 44, 45-55.
Taylor, S. J. (1986). Modeling Financial Time Series. John Wiley and Sons, Chichester.
Tong, H. (1983). Threshold models in non-linear time series analysis.
Springer-Verlag: New York.
Verma, R., and Verma, P. (2007). Noise Trading and Stock Market Volatility. Journal
of Multinational Financial Management, 17, 231-243.
Wang, C. (2001). Investor Sentiment and Return Predictability in Agricultural Futures Markets. Journal of Futures Markets, 21, 929-952.
Wang, Y. H., Keswani, A., and Taylor, S. (2006). The Relationships between Sentiment, Returns and Volatility. International Journal of Forecasting, 22, 109-123.
Whaley, R. E. (1993). Derivatives on Market Volatility: Hedging Tools Long Overdue.
Journal of Derivatives, 1, 71-84.
Whaley, R. E. (2000). The Investor Fear Gauge. Journal of Portfolio Management, 26, 12-17.
Wu, G. (2001). The Determinants of Asymmetric Volatility. Review of Financial
Studies, 14, 837-859.
Yuan, S. F., and Lee, C. S. (2005). The Property of Market Volatility Index on Taiwan Market: Taifex‟s VXO and Prospect Theory. Journal of Management, 24, 211-228.
Curriculum Vita
Ph.D. in Management, National Chiao Tung University, Taiwan Aug. 2004 ~ Jul. 2010
M.A. in Finance, Ming Chung University Graduate School, Taiwan Aug. 2000 ~ Jul. 2002
B.A. in Statistics, National Cheng Chi University, Taiwan Aug. 1996 ~ Jul. 2000
Research Issues
Issues：Financial Time Series, Behavioral Finance, Market Microstructure, Financial Text Mining
Software：MATLAB, EViews, SAS, RATS
Publications
Sheu, Her-Jiun and Yu-Chen Wei, (2010) “Effective Options Trading Strategies Based on Volatility Forecasting Recruiting Investor Sentiments,” Expert
Systems with Applications, Forthcoming (SCI, 2009 I.F. =2.908).
Sheu, Her-Jiun, Yang-Cheng Lu and Yu-Chen Wei, (2010) “Causalities between the Sentiment Indicators and Stock Market Returns under Different Market Scenarios,” International Journal of Business and Finance Research, 4(1), pp. 159-171 (EconLit , eJEL).
Lu, Yang-Cheng and Yu-Chen Wei, (2009) “Classification of Trade Direction for an Equity Market with Price Limit and Order Match: Evidence from the Taiwan Stock Market,” Investment Management and Financial Innovations, 6(3), pp. 135-146 (EconLit , eJEL).
Sheu, Her-Jiun, Yang-Cheng Lu and Yu-Chen Wei, (2009) “Nonlinear Co-movements and Causalities between the Implied Index from the Options Volatility and the Equity Index in Taiwan,” Journal of Futures and Options, 2(1), pp. 1-32.
Lu, Yang-Cheng, Tsang-Yao Chang and Yu-Chen Wei, (2007) “An Empirical
July, 2010
Note on Testing the Cointegration Relationship between the Real Estate and Stock Markets in Taiwan,” Economics Bulletin, Vol. 3, No. 45, pp. 1-11 (EconLit, eJEL).
Submitted or Working Researches
Non-linear Anomalies between Stock Market Returns and the Weather in the Emerging Taiwan Equity Market (with Yang-Cheng Lu)
An Effective Multiple-factor Model for Volatility Forecasting Considering the Threshold Affection from Volatility Index – Evidence from the Taiwan Stock and Option Markets (with Her-Jiun Sheu)
The Application of Information Sentiments to the Warning Model of Abnormal Return and Portfolio Management (with Yang-Cheng Lu and Chien-Wei Chang)
The Spillover Effect of the Volatility Index on Underlying Equity Returns:
Evidence from Asian Emerging Markets (with Her-Jiun Sheu)
The Application of Financial News-Corpus Mining to the Warning Model for Corporate Financial Distress (with Yang-Cheng Lu)
Stealth Trading, Aggressiveness of Trades and Investor Types: Evidence from the Emerging Taiwan Equity Market (with Yang-Cheng Lu and Chien-Wei Chang)
Does stealth trading behavior and price manipulation reveal in the institutional investors in the Taiwan stock market? (with Yang-Cheng Lu)
Journal Reviewer
Economics Bulletin (EconLit, eJEL)
African Journal of Business Management (SSCI)
Conference Discussant
The 4th International Conference on Asia-Pacific Financial Markets, Seoul, Korea The 59th Midwest Finance Association Annual Meeting, Las Vegas, USA
Conference, Workshop and Seminar Presentation
Sheu, Her-Jiun and Yu-Chen Wei, “Nonlinear Co-movement and Causalities between the Investor Fear Gauge and Market Index,” 2010 International
Symposium on Finance and Accounting (ISFA), Kitakyushu, Japan, July,
2010.Lu, Yang-Cheng, Yu-Chen Wei and Chien-Wei Chang, “The Application of Information Sentiments to the Warning Model of Abnormal Return and Portfolio Management,” 2010 International Symposium on Finance and
Accounting (ISFA), Kitakyushu, Japan, July, 2010.
Sheu, Her-Jiun and Yu-Chen Wei, “The Spillover Effect of the Volatility Index on Underlying Equity Returns: Evidence from Asian Emerging Markets,”
2010 Conference on Financial Markets and Prospects, Taipei, March, 2010.
Lu, Yang-Cheng, Chen-Nan Chen, Yu-Chen Wei and William S Chang, “The Application of Financial News-Corpus Mining to the Warning Model for Corporate Financial Distress,” The 59th
Annual Meetings of Midwest
Finance Association, Las Vegas, February, 2010.
Lu, Yang-Cheng, Yu-Chen Wei and William S Chang, “The Application of Text Mining on Financial Corpus to the Early Warning Model for Corporate Financial Distress,” The 17th
Conference on the Theories and Practices of Securities and Financial Markets, Kaohsiung, December, 2009.
Lu, Yang-Cheng, Yu-Chen Wei and Chien-Wei Chang, “Stealth Trading, Aggressiveness of Trades and Investor Types: Evidence from the Emerging Taiwan Equity Market,” in the 4th
International Conference on Asia-Pacific Financial Markets, Seoul, Korea, December, 2009.
Sheu, Her-Jiun and Yu-Chen Wei, “Effective Options Trading Strategies Based on Volatility Forecasting Recruiting Investor Sentiments,” 2009
International Symposium on Finance and Accounting (ISFA), Malaysia, July,
2009.Lu, Yang-Cheng, Yu-Chen Wei, Chen-Nan Chen and Tzu-Lin Chu,
“Effectiveness of the Default-Corpus from Linguistic Data Mining on the Prediction of Corporate Default Probability,” in the 2009 International
Conference of Taiwan Finance Association, Taoyuan, June, 2009.
Sheu, Her-Jiun, Yang-Cheng Lu and Yu-Chen Wei, “Causalities between the Sentiment Indicators and Stock Market Returns under Different Market Scenarios,” 2009 Global Conference on Business and Finance (GCBF), Costa Rica, May, 2009.
Sheu, Her-Jiun, Yang-Cheng Lu and Yu-Chen Wei, “Nonlinear Co-movement and Causalities between the Volatility Index and Its Underlying Equity Index in Taiwan,” The Sixth Conference on Banking and Finance and
Financial Trend, Taipei, January, 2009.
Lu, Yang-Cheng and Yu-Chen Wei, “Does stealth trading behavior and price manipulation reveal in the institutional investors in the Taiwan stock market?” The Sixth Conference on Banking and Finance and Financial
Trend, Taipei, January, 2009.
Sheu, Her-Jiun, Yang-Cheng Lu and Yu-Chen Wei, “An Effective Multiple-factor Model for Volatility Forecasting Recruiting the Threshold Affection from Volatility Index – Evidence from the Taiwan Stock and Option Markets,”
The 16
thConference on the Theories and Practices of Securities and Financial Markets, Kaohsiung, December, 2008.
Sheu, Her-Jiun, Yang-Cheng Lu, Yu-Chen Wei and Yu-Chun Wang, “Causalities between the Sentiment Indicators and Stock Market Returns under Different Market Scenarios,” in the First Asia Conference on Financial Engineering
and Markets, Hong Kong, June, 2008.
Lu, Yang-Cheng, Yu-Chen Wei and Chien-Wei Chang, “Trade Direction Classification in Taiwan Stock Market,” in the First Asia Conference on
Financial Engineering and Markets, Hong Kong, June, 2008.
Lu, Yang-Cheng, Yu-Chen Wei and Ka-Te Li, “Does stealth trading behavior and price manipulation reveal in the institutional investors in the Taiwan stock market?” in the 2008 Annual Conference of Taiwan Finance Association,
Lu, Yang-Cheng and Yu-Chen Wei, “Nonlinear Co-movements and Causalities
between the Implied Index from Options Volatility Index and the Underlying Stock Index in Taiwan,” in 2007 Annual Conference of the
Financial Engineering Association of Taiwan, Taipei, July, 2007.
Sheu, Her-Jiun, Yang-Cheng Lu and Yu-Chen Wei, “A Multiple Indicators Model for Volatility Forecasting Using Threshold Model – Evidence in Taiwan Stock Market,” in 2007 Annual Conference of the Financial Engineering
Association of Taiwan, Taipei, July, 2007.
Lu, Yang-Cheng, Chun-Hung Wei, Yu-Chen Wei and Cheng-Wei Chang,
“Nonlinear Comovement and Causality Behavior between the Korean KOSPI 200 Volatility Index and Its Underlying Stock Index - A Test Based on the STVECM- GJR -GARCH,” in The Annual Meeting and Conference
of the Chinese Institute of Decision Science, Hsinchu, June, 2006.
Lu, Yang-Cheng, Chung-Jung Lee and Yu-Chen Wei, “Does Volatility Index of Taiwan Stock Market Precede with Underlying Equity Index？Application of Multi-Thresholds Vector Error-Correction Model,” in 2006 Annual
Conference of TFA on Finance, Insurance, and Real Estate, Taipei, May,
2006.Teaching Experiences
Lecturer in the Finance Department, Ming Chuan University Feb. 2008 ~ Jul. 2010
International Portfolio Analysis with the Consideration of Volatility, Spillover Effect and Information Flow (NSC-96-2416 -H-009 -020- MY3)
Aug. 2007 ~ Jul. 2010, National Science Council, Taipei, Taiwan
A Text Mining Based Artificial Intelligence System on the Prediction of Corporate Default Probability and Investor Sentiment Derived Abnormal Returns (98-EC-17-A-29-S2-0147)
Jun. 2009 ~ May. 2010, Department of Industrial Technology (DoIT) of the Ministry of Economic Affairs (MOEA), Taiwan
信用結構型金融商品風險管理與結算制度集中化管理之可行性分析-從美國
Aug. 2006 ~ Jul. 2007, National Science Council, Taipei, Taiwan
企業危機發生機率預警模型
Jun. 2005 ~ Jan. 2006, 銘傳大學財務金融所暨時報資訊股份有限公司共 同發展研究計畫
Other Publications
盧陽正、王麗惠、方豪、魏裕珍、張健偉 (2007)。債券市場理論與實務翻 譯（Fabozzi, F., Bond Markets: Analysis and Strategies, 7th ed., 2007）。台 北市：雙葉書廊。
Honors, Grants and Scholarships
Traveling Grant for the International Symposium on Finance and Accounting (ISFA), Japan (2010), Granted by National Science Council (Grant Number:
NSC-99-2922-I-009-102), Taipei, Taiwan
Traveling Grant for the 4th International Conference on Asia-Pacific Financial Markets, Korea (2009), Granted by Ministry of Education (Grant Number:
09D250), Taipei, Taiwan
Traveling Grant for the International Symposium on Finance and Accounting (ISFA), Malaysia (2009), Granted by National Science Council (Grant Number: NSC-98-2922-I-009-068), Taipei, Taiwan
Outstanding Research Award of the Global Conference on Business and Finance (2009), Costa Rica
Traveling Grant for the First Asia Conference on Financial Engineering and Markets, Hong Kong, (2008), Granted by Ministry of Education (Grant Number: 08D137), Taipei, Taiwan
Research Scholarship (Aug. 2006 ~ Jul. 2008) Granted by the National Science Council, Taipei, Taiwan
Master‟s Thesis Award (2002), A Multi-Stage Real Option Approach on the Evaluation of the On Line Game Company - Case Study for NCsoft, Granted by the National Science Council