A Exploring the Relationship Between the Put Call Ratio and Market Indices

The equity put/call ratio (PCR) from the Chicago Board Options Exchange (CBOE) is widely regarded by market participants as an indicator of market sentiment and positioning. While frequently used as a contrarian signal for traders, long-term investors often adjust their positions based on extreme PCR levels. This paper evaluates the relevance of the PCR as a sentiment indicator by examining its correlations, causal relationships, and responsiveness with the S&P 500 and BET indices. By conducting an empirical analysis across two distinct markets developed market and a frontier market, the study sheds light on the behavior of the PCR in these contrasting contexts, with particular emphasis on the structural limitations and behavioral nuances of the BET index. The findings reveal that while the PCR demonstrates limited predictive capacity for market movements, shocks to the S&P 500 significantly influence the PCR. Conversely, the relationship between the PCR and the BET index is negligible, reflecting the unique constraints of the Romanian market, such as its low liquidity and the absence of derivative markets. These results underscore the need to adapt sentiment indicators to the specific characteristics of frontier markets.