Whose sentiment explains implied volatility change and smile?

Investment Behavior of Foreign Institutional Investors and Implied Volatility Dynamics: An Empirical Study on the Indian Equity Derivatives Market

“…If institutional investors are buying options in large quantities, this may increase the demand for option strikes and increase option premiums due to higher implied volatility 2 of 14 (Ryu et al 2023). Conversely, this can increase the supply of options resulting in a pushdown of the option premiums (Ryu et al 2023).…”

“…If institutional investors are buying options in large quantities, this may increase the demand for option strikes and increase option premiums due to higher implied volatility 2 of 14 (Ryu et al 2023). Conversely, this can increase the supply of options resulting in a pushdown of the option premiums (Ryu et al 2023). Overall, the trading activity of institutional investors can have a significant impact on the level of implied volatility in stock prices (Shiu et al 2010).…”

“…Overall, the trading activity of institutional investors can have a significant impact on the level of implied volatility in stock prices (Shiu et al 2010). The Indian capital market, which is still a semi-efficient capital market, is dominated by Foreign Institutional Investors (FIIs) trading in the equity market, which accounts for about one-third of the total trading volume on each trading day (Ryu et al 2023). Therefore, the trading behavior of FIIs has a significant role in the movement of asset price in the Indian capital market (Fan and Feng 2022), especially in the derivatives segment where traders rely heavily on expected volatility rather than on asset fundamentals (Vardhan and Sinha 2016).…”

“…It is important to note that the relationship between foreign institutional investors and implied volatility is complex and may not always be straightforward (Ryu et al 2023). Institutional investors may influence volatility through their net buying pressure, but they are also subject to the same market forces that drive volatility (Votano et al 2004;Shaikh and Padhi 2014), such as changes in market sentiment or economic conditions.…”