Volatility Forecasting Using Financial Statement Information

Posted: 15 Jan 2012 Last revised: 29 Jan 2015

See all articles by Suhas A. Sridharan

Suhas A. Sridharan

Emory University - Goizueta Business School

Date Written: September 11, 2013


This paper examines whether financial statement information can predict future realized volatility incremental to the volatility implied by option market prices. Prior research establishes that option-implied volatility is a biased estimator of future realized volatility. I use an analytical framework to identify accounting-based drivers of equity returns volatility. My main hypothesis is accounting-based drivers can be used to forecast future volatility incremental to either past volatility or the market’s expectation of future volatility quantified as option-implied volatility. I confirm this empirically and show that my findings are robust to the measurement of option-implied volatility using either a model-free approach or the Black-Scholes model. I also document abnormal returns to a option-based trading strategy that takes a long (short) position in firms with financial statement information indicative of high (low) future volatility. Additionally, I provide evidence that contradicts a risk-based explanation for the incremental predictive ability of accounting-based variables. Taken together, my results indicate that the market’s failure to fully process accounting-based fundamental information explains some of the previously documented bias in implied volatility.

Keywords: volatility, fundamental analysis, option returns

JEL Classification: M41, G12, G13, G14

Suggested Citation

Sridharan, Suhas A., Volatility Forecasting Using Financial Statement Information (September 11, 2013). Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1984324 or http://dx.doi.org/10.2139/ssrn.1984324

Suhas A. Sridharan (Contact Author)

Emory University - Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States

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