The Opposing Effects of Information Complexity and Information Content on Return Volatility

51 Pages Posted: 9 Dec 2014 Last revised: 12 Jan 2018

See all articles by Frederico Belo

Frederico Belo

University of Minnesota; INSEAD; National Bureau of Economic Research (NBER)

Jun Li

University of Texas at Dallas

Xiaoji Lin

University of Minnesota

Xiaofei Zhao

Georgetown University - Robert Emmett McDonough School of Business

Date Written: January 10, 2018

Abstract

We evaluate the impact of complexity and content of new information on stock return volatility dynamics around 10-K fillings. On average, return volatility increases by 0.4% in the first four weeks after the release of the report, followed by a 2.6% decrease in the subsequent six weeks. This hump-shaped dynamics is more pronounced for firms with larger 10-K reports. The effects are economically significant: an options-based investment strategy exploring the volatility dynamics generates 17.3% annualized return spread. Our findings highlight the importance of timing for understanding the opposing effects of complexity and content of new information on asset prices.

Keywords: Learning; Complexity; Information; Volatility dynamics

JEL Classification: G14; D82; D83; M41

Suggested Citation

Belo, Frederico and Li, Jun and Lin, Xiaoji and Zhao, Xiaofei, The Opposing Effects of Information Complexity and Information Content on Return Volatility (January 10, 2018). Available at SSRN: https://ssrn.com/abstract=2535469 or http://dx.doi.org/10.2139/ssrn.2535469

Frederico Belo

University of Minnesota ( email )

19th Avenue South
Minneapolis, MN 55455
United States

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jun Li (Contact Author)

University of Texas at Dallas ( email )

800 West Campbell Road, SM 31
Richardson, TX 75080
United States
972-883-4422 (Phone)

Xiaoji Lin

University of Minnesota ( email )

420 Delaware St. SE
Minneapolis, MN 55455
United States

Xiaofei Zhao

Georgetown University - Robert Emmett McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States

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