Volatility Spreads and Earnings Announcement Returns
30 Pages Posted: 25 Nov 2009 Last revised: 28 Jul 2015
Date Written: December 12, 2012
Abstract
Prior research documents that volatility spreads predict stock returns. If the trading activity of informed investors is an important driver of volatility spreads, then the predictability of stock returns should be more pronounced during major information events. This paper investigates whether the predictability of equity returns by volatility spreads is stronger during earnings announcements. Volatility spreads are measured by the implied volatility differences between pairs of strike price and expiration date matched put and call options and capture price pressures in the option market. During a two-day earnings announcement window, the abnormal returns to the quintile that includes stocks with relatively expensive call options is more than 1.5 percent greater than the abnormal returns to the quintile that includes stocks with relatively expensive put options. This result is robust after measuring volatility spreads in alternative ways and controlling for firm characteristics and lagged equity returns. The degree of announcement return predictability is stronger when volatility spreads are measured using more liquid options, the information environment is more asymmetric, and stock liquidity is low.
Keywords: cross-section of equity returns, volatility spreads, equity options, information flow, put-call parity.
JEL Classification: G10, G12, G13, G14
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
What Does Individual Option Volatility Smirk Tell Us About Future Equity Returns?
By Xiaoyan Zhang, Rui Zhao, ...
-
Volatility Spreads and Expected Stock Returns
By Turan G. Bali and Armen Hovakimian
-
Volatility Spreads and Expected Stock Returns
By Turan G. Bali and Armen Hovakimian
-
Implied Volatility Spreads and Expected Market Returns
By Yigit Atilgan, Turan G. Bali, ...
-
Implied Volatility Spreads and Expected Market Returns
By Yigit Atilgan, Turan G. Bali, ...
-
Option Returns and Volatility Mispricing
By Amit Goyal and Alessio Saretto
-
Option-Implied Measures of Equity Risk
By Bo Young Chang, Peter Christoffersen, ...
-
The Joint Cross Section of Stocks and Options
By Andrew Ang, Turan G. Bali, ...
-
The Joint Cross Section of Stocks and Options
By Byeong-je An, Andrew Ang, ...
-
The Joint Cross Section of Stocks and Options
By Byeong-je An, Andrew Ang, ...