Limits of Arbitrage, Sentiment and Pricing Kernel: Evidences from Index Options

This paper provides evidences that there are limits to arbitrage in the index options market, and that the pricing kernel depends investor sentiment. First, we nd that sentiment of the institutional investors is a signi cant determinant for index options demand, as well as the deviation of the S&P 500 index level from the fundamentals. Second, the institutional sentiment and the index ..