The Informational Content of Implied Volatility Around Stock Splits
53 Pages Posted: 3 Nov 2005
Date Written: September 2005
Abstract
Previous research has been mixed with respect to whether option implied volatility reflects market expectations about future realized volatility for the underlying asset. This paper uses a previously documented volatility increasing event, the stock split, to investigate the informational content in implied volatility around stock split announcements. We find that the time series profile of implied volatility around stock splits is consistent with the predictions of standard option pricing theory. Option market participants appear to revise their forecasts of future realized volatility permanently upward at the split announcement. In addition, we find that changes in implied volatility at the split announcement provide informative forecasts of changes in realized stock volatility at the ex-date. However, these forecasts are biased and inefficient as other known, firm-specific variables improve the forecasts of changes in realized volatility. The use of intra-daily realized volatility estimates rather than those based on daily observations significantly reduces the bias in predictive regressions.
Keywords: Implied Volatility, Stock Splits, Realized Volatility
JEL Classification: G13, G14
Suggested Citation: Suggested Citation
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