National Central University, National Tsing Hua University,National Taiwan University
We set out in this study to investigate whether the existence or strength of any misreaction is affected by investor sentiment within the options market in Taiwan. Based upon a unique dataset providing the complete history of all transactions in the Taiwan options market, we explore the issue not only from the marketwise observations, but also from the transactions across investor categories. We find that individual investors exhibit significant misreaction to information, with such misreaction becoming stronger during periods of high investor sentiment. Moreover, more active individual investors always exhibit misreaction and have never learned from their past mistakes. Our empirical results are robust to alternative measures of investor sentiment and definitions of long- and short-term horizons.