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
Date Written: April 21, 2019
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: Suggested Citation