Information from Implied Volatility Comovements and Insider Trades

Abstract

We investigate whether implied volatility comovements reflect the degree to which a firm’s private information is informative about future macroeconomic news. We compute IVC, the comovement of the implied volatilities between the firm and the aggregate market. IVC measures the extent to which option investors expect the coincidence of future firm and macroeconomic information arrival. Using insider purchases as a proxy for firms’ private information and future aggregate equity returns as a proxy for macroeconomic news, we find that IVC moderates the association between firms’ private information and macroeconomic news. Consistent with this finding, we also find that firms with higher IVC have stock returns that are more informative about future aggregate earnings and have stronger aggregate market reactions to their earnings announcements. Overall, IVC effectively measures the relevance of a firm’s private information to aggregate markets.

Keywords: Volatility, Accounting Earnings, Macroeconomy, Insider Trading, Forecasting, Bellwether

JEL Classification: G14, M41, G12, G13