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This paper investigates changes in risk-neutral distribution derived from Taiwan stockindex options under different market conditions. The purpose of this paper is to explore whether individual investor sentiment significantly influences the Taiwan option prices.

The authors adopt the optimization method to estimate the risk-neutral distribution from the Taiwan stock index options and use the t-test to examine the difference in risk-neutral skewness, kurtosis, and confidence interval between the pre-crisis and crisis periods. This paper tests the impact of individual investor sentiment on risk-neutral skewness and confidence interval in two sub-periods.

The authors find that errors in individual investors’ expectations significantly influence the Taiwan stock index option prices.

The data concerning the sentiment of speculative institutional investors are incomplete for the Taiwan option market. Therefore, this paper focusses on the analysis of individual investor sentiment. Further research can study the impact of institutional investor sentiment in emerging markets.

The previous literature has suggested that option prices reflect information before the information is revealed in stock prices. Therefore, an important implication is to analyze the information quality revealed in option prices by studying whether the changes in option prices are due to investor sentiment or non-sentiment-related components.

Most of the studies in the literature have focussed on the US option market, and their applicability may vary across different microstructures. This paper shows that the influence of individual investor sentiment in an emerging market is different from that in the US market.