Volatility Information Transfer along the Supply Chain
48 Pages Posted: 9 Apr 2021 Last revised: 7 Jul 2021
Date Written: April 8, 2021
We investigate whether and how information about one stock’s future volatility is transferred to other related stocks along the supply chain. The supply chain setting offers an ideal setting to study the effect of cross-firm volatility information transfer because customers and suppliers are closely related. Earnings announcements can have an impact on the announcing firm's short-term, long-term, and forward expected volatility. We find that, on average, the announcing firms’ short-term expected volatility decreases substantially after earnings announcements, while the change of their forward expected volatility is close to zero. Regression analysis shows that the change of the announcing firm’s short-term (forward) volatility has a significant effect on the change of its supply chain partner’s short-term (forward) volatility. The effect is economically meaningful and becomes stronger if customers and suppliers are more closely related. Our results yield new insights on the transfer of volatility related information among firms.
Keywords: Customer-supplier relationship, Model free implied volatility, Quarterly earnings announcement, Supply chain, Volatility information transfer
JEL Classification: G12, G13, G14, G17
Suggested Citation: Suggested Citation