Evolution of Market Uncertainty around Earnings Announcements
University of Fribourg - Faculty of Economics and Social Science
HEC Paris - Finance Department
May 15, 2005
This paper investigates theoretically and empirically the dynamics of the implied volatility (or implied standard deviation - ISD) around earnings announcements dates. The volatility implied by option prices can be interpreted as the level of volatility expected by the market over the remaining life of the option. We propose a theoretical framework for the evolution of the ISD that takes into account two well-known features of the instantaneous volatility: volatility clustering and the leverage effect. In this context, the ISD should decrease after an earnings announcement but the post-announcement ISD path depends on the content of the earnings announcement: good news or bad news. An empirical investigation is conducted on the Swiss market over the period 1989-1998.
Number of Pages in PDF File: 24
Keywords: implied volatility, earnings announcements, leverage effect
JEL Classification: G13, G14working papers series
Date posted: June 7, 2006
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