Are Investment Strategies Exploiting Option Investor Sentiment Profitable? Evidence from Japan

Chikashi TSUJI


This paper demonstrates that the put–call ratio (PCR), an index of option investor sentiment, is useful for equity investment. More specifically, we find that monthly market timing strategies for the Nikkei 225 using the PCRs of Nikkei 225 index options are profitable, even after considering transaction costs. This evidence suggests that the PCR operates as a useful contrarian indicator for the underlying asset in Japan. Our analysis also reveals that application of the multivariate GARCH model in Japan is effective in predicting changes in the Nikkei 225 using the level of PCR.

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International Journal of Business and Management   ISSN 1833-3850 (Print)   ISSN 1833-8119 (Online)

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