Non-Diversifiable Volatility Risk and Risk Premiums at Earnings Announcements
51 Pages Posted: 7 Jul 2010 Last revised: 20 Oct 2014
Date Written: January 2014
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: Suggested Citation