Measuring Risk from IT Initiatives Using Implied Volatility

Journal of the Association for Information Systems, 20(11), November 2019, 247-265, 2019

Posted: 27 May 2020

See all articles by Dawei (David) Zhang

Dawei (David) Zhang

Lehigh University

Barrie R. Nault

University of Calgary - Haskayne School of Business

Date Written: January 25, 2019

Abstract

We propose an under-recognized measure to capture changes in firm risk from information technology (IT) announcements: implied volatility (IV) from a firm’s exchange-traded options. An IV is obtained from a priced stock option and represents the option market’s expectation of the firm’s average stock return volatility over the remaining duration of the option. Using the change in IV around IT announcements, we can directly assess changes in IT-induced firm risk. IVs are straightforward to obtain, and are forward-looking based on option market investors’ estimates of future stock return volatility. They do not rely on historical volatility that is confounded with other events. In addition, options have different expiration dates — each with an IV — allowing us to distinguish between short- and long-term risk. We show how a change in IV can be employed to assess changes in short- and long-term firm risk from IT announcements and demonstrate this methodological innovation empirically using a set of IT announcements that have been utilized in previous studies.

Keywords: Information Technology (IT) Announcements, Firm Risk, Implied Volatility, Options

Suggested Citation

Zhang, Dawei (David) and Nault, Barrie R., Measuring Risk from IT Initiatives Using Implied Volatility (January 25, 2019). Journal of the Association for Information Systems, 20(11), November 2019, 247-265, 2019, Available at SSRN: https://ssrn.com/abstract=3578092

Dawei (David) Zhang

Lehigh University ( email )

621 Taylor Street
Bethlehem, PA 18015
United States

Barrie R. Nault (Contact Author)

University of Calgary - Haskayne School of Business ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada

HOME PAGE: http://ucalgary.ca/bnault

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