Non-Diversifiable Volatility Risk and Risk Premiums at Earnings Announcements

51 Pages Posted: 7 Jul 2010 Last revised: 20 Oct 2014

See all articles by Mary E. Barth

Mary E. Barth

Stanford University - Graduate School of Business

Eric C. So

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: January 2014

Abstract

This study seeks to determine whether earnings announcements pose non-diversifiable volatility risk that commands a risk premium. We find that investors anticipate some earnings announcements to convey news that increases market return volatility and pay a premium to hedge this non-diversifiable risk. In particular, we find evidence of risk premiums embedded in prices of firms’ traded options that are significantly positively associated with the extent to which the firms’ earnings announcements pose non-diversifiable volatility risk. In addition, we find that volatility risk premiums are concentrated among bellwether firms and result in predictable variation in option straddle returns around earnings announcements. Taken together, our findings show that some earnings announcements pose non-diversifiable volatility risk that commands a risk premium.

Keywords: Earnings announcements, volatility risk, non-diversifiable risk, option pricing

JEL Classification: M41, G12, G13, G14

Suggested Citation

Barth, Mary E. and So, Eric C., Non-Diversifiable Volatility Risk and Risk Premiums at Earnings Announcements (January 2014). Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1635584 or http://dx.doi.org/10.2139/ssrn.1635584

Mary E. Barth (Contact Author)

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-723-9040 (Phone)
650-725-0468 (Fax)

Eric C. So

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
707
Abstract Views
3,183
rank
34,718
PlumX Metrics