Can Implied Volatility Comovements Capture More Than Volatility Risk? Evidence from Insider Trades and Aggregate Equity Returns

49 Pages Posted: 8 Nov 2017 Last revised: 23 May 2019

See all articles by Robert M. Bushman

Robert M. Bushman

University of North Carolina Kenan-Flagler Business School

Vivek Raval

University of Illinois at Chicago - Department of Accounting

Sean Wang

Southern Methodist University

Date Written: April 21, 2019

Abstract

The prevailing view of implied volatility comovements, IVC, defined as the correlation between a firm’s implied volatility and the market’s implied volatility, is that they indicate the presence of systematic volatility risk to the firm’s investors. We take a different stance and conjecture that implied volatility comovements can also indicate expected information arrival for both the firm and aggregate equity markets, and we find evidence supporting this view. Our most convincing evidence is that firms with higher implied volatility comovement have insider purchases that are more strongly associated with information about aggregate equity markets. We test whether insider purchases at these firms relate to news regarding aggregate discount rates and find little evidence of this, suggesting that information revealed by these insiders at firms with high IVC primarily informs equity markets about future market-level cash flows and earnings. We find similar evidence in other settings. Firms with higher IVC have stock returns that are more informative about future aggregate earnings surprises, and they have stronger aggregate market reactions to their earnings announcements. Our results suggest that properties of a firm’s implied volatility have important implications for the nature of information generated by the firm.

Keywords: Accounting Earnings, Corporate Profits, Insider Trading, Macro Forecasting, Macroeconomics, Option Prices, Volatility

JEL Classification: G11, G14, M41

Suggested Citation

Bushman, Robert M. and Raval, Vivek and Wang, Sean, Can Implied Volatility Comovements Capture More Than Volatility Risk? Evidence from Insider Trades and Aggregate Equity Returns (April 21, 2019). Available at SSRN: https://ssrn.com/abstract=3066342 or http://dx.doi.org/10.2139/ssrn.3066342

Robert M. Bushman

University of North Carolina Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-962-9809 (Phone)

HOME PAGE: http://public.kenan-flagler.unc.edu/faculty/bushmanr/

Vivek Raval

University of Illinois at Chicago - Department of Accounting ( email )

601 South Morgan Street
University Hall, Room 2303
Chicago, IL 60607
United States

Sean Wang (Contact Author)

Southern Methodist University ( email )

P.O. Box 750333
Dallas, TX 75275-0333
United States
2147682858 (Phone)

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