Author(s): Yi Zhang
Friesen et al. demonstrate that investor heterogeneous beliefs affect option prices and explain the risk neutral skewness. Following their study, this paper examines the cross-sectional relation between heterogeneous beliefs and the option implied volatility smile. Examining the impact of heterogeneous beliefs on puts and calls separately produces more insights on the effect of heterogeneous beliefs on option prices. The paper finds that stocks with greater belief differences have more pronounced volatility smiles steeper put slopes and steeper call slopes. These results confirm the findings of Friesen, Zhang and Zorn (2012) that investor heterogeneous beliefs affect option prices and further demonstrate this impact is same for puts and calls. This study also suggests that empirical studies of heterogeneous beliefs are robust to various measures of option prices.