Volatility Information Transfer along the Supply Chain

48 Pages Posted: 9 Apr 2021 Last revised: 7 Jul 2021

See all articles by Wenli Huang

Wenli Huang

Hong Kong Polytechnic University

Gang Li

Hong Kong Polytechnic University

Shaojun Zhang

Hong Kong Polytechnic University

Date Written: April 8, 2021

Abstract

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

Huang, Wenli and Li, Gang and Zhang, Shaojun, Volatility Information Transfer along the Supply Chain (April 8, 2021). Available at SSRN: https://ssrn.com/abstract=3822362 or http://dx.doi.org/10.2139/ssrn.3822362

Wenli Huang

Hong Kong Polytechnic University ( email )

School of Accounting and Finance
Hung Hom, Kow Loon, Hong Kong
Hong Kong

Gang Li

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

Shaojun Zhang (Contact Author)

Hong Kong Polytechnic University ( email )

Hung Hom, Kowloon
Hong Kong

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