Measuring Risk Information

50 Pages Posted: 7 Feb 2020

See all articles by Kevin Smith

Kevin Smith

Stanford University Graduate School of Business

Eric C. So

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: January 14, 2020

Abstract

We develop a measure of how information events impact investors’ perceptions of firms’ riskiness. We derive this measure from an option-pricing model where investors anticipate an announcement containing information on the mean and variance of firms’ future prices. We apply the measure to firms’ earnings announcements and show it has many desirable properties: it predicts firms’ return volatilities, risk-factor exposures, implied costs of capital, the timing of heightened volatility, and deterioration in fundamental performance, and outperforms textual-based proxies. Together, our study offers an approach for studying risk information conveyed by information events that is simple to implement and broadly applicable.

Keywords: risk information, option prices, earnings announcements, volatility forecasting

JEL Classification: G10, G11, G12, G14, M40, M41

Suggested Citation

Smith, Kevin and So, Eric C., Measuring Risk Information (January 14, 2020). Stanford University Graduate School of Business Research Paper No. 3519543. Available at SSRN: https://ssrn.com/abstract=3519543 or http://dx.doi.org/10.2139/ssrn.3519543

Kevin Smith (Contact Author)

Stanford University Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Eric C. So

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

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