The Information Content of Implied Skewness and Kurtosis Changes Prior to Earnings Announcements for Stock and Option Returns

36 Pages Posted: 2 Dec 2008

See all articles by Dean Diavatopoulos

Dean Diavatopoulos

Seattle University

James Doran

University of New South Wales

Andy Fodor

Ohio University

David R. Peterson

Florida State University - Department of Finance

Date Written: December 1, 2008

Abstract

We explore whether changes in stock return skewness and kurtosis, as implied in option prices preceding earnings announcements, provide information about subsequent stock and option returns through the announcement. We demonstrate that the change in skewness and kurtosis can be related to changing jump risk premiums, where jump risk can be associated with the uncertainty around the direction and size of the stock price response to the earnings announcement. As such, implied skewness (kurtosis) should capture the direction (magnitude) of a stock jump if option prices change as a result of changing jump risk size and intensity. Examining changes in implied skewness and kurtosis preceding over 74,000 earnings announcements for over 4700 firms, we find that both moments have strong predictive power for future stock returns, even after controlling for implied volatility. Additionally, changes in both moments predict call returns, while put return predictability is primarily linked to skewness. Thus, prior to earnings announcements, option prices contain information about future security returns.

Keywords: Earnings announcements, Option Prices, Higher-Order Moments

JEL Classification: G11, G12, M41

Suggested Citation

Diavatopoulos, Dean and Doran, James and Fodor, Andy and Peterson, David R., The Information Content of Implied Skewness and Kurtosis Changes Prior to Earnings Announcements for Stock and Option Returns (December 1, 2008). Available at SSRN: https://ssrn.com/abstract=1309613 or http://dx.doi.org/10.2139/ssrn.1309613

Dean Diavatopoulos

Seattle University ( email )

901 12th Avenue
Seattle, WA 98122
United States

James Doran (Contact Author)

University of New South Wales ( email )

College Rd
Sydney, NSW 2052
Australia

Andy Fodor

Ohio University ( email )

514 Copeland Hall
Athens, OH 45701
United States
740.593.0259 (Phone)

David R. Peterson

Florida State University - Department of Finance ( email )

Tallahassee, FL 32306-1042
United States
850-644-8200 (Phone)
850-644-4225 (Fax)

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