Market Volatility Risk and Risk Premiums at Earnings Announcements
Mary E. Barth
Stanford University - Graduate School of Business
Eric C. So
Massachusetts Institute of Technology (MIT) - Sloan School of Management
January 4, 2013
This study seeks to determine whether earnings announcements pose market volatility risk that commands a risk premium. We find evidence of risk premiums embedded in prices of traded options that hedge against market volatility risk at earnings announcements. This evidence indicates that investors anticipate these announcements to convey market-wide news and are averse to the increase in market uncertainty associated with the announcements. In addition, we find that S&P500 index options reflect a higher expected correlation among index components when market volatility risk associated with earnings announcements is high. Taken together, our findings show that some earnings announcements pose market volatility risk that commands a risk premium.
Number of Pages in PDF File: 54
Keywords: Earnings announcements, volatility risk, non-diversifiable risk, option pricing
JEL Classification: M41, G12, G13, G14working papers series
Date posted: July 7, 2010 ; Last revised: January 7, 2013
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