Accounting quality,information risk and the term structure of implied volatility around earnings announcements

We examine the association between accounting quality, which is used as a proxy for firm information risk, and the behavior of the term structure of implied option volatility around earnings announcements. By employing a large sample of US firms having options traded on their equity during 1996–2010, we find that lower (higher) accounting quality is significantly associated with stronger (weaker) changes in the steepness of the term structure of implied volatility curve around quarterly earnings announcements. This finding (which is robust to controls for business-stemming uncertainty regarding future firm performance) is consistent with a stronger differential of short vs. long-term uncertainty for higher information risk firms, indicating greater uncertainty on the future economic performance of poorer vs. stronger accounting quality firms. We also establish the trading implications of these findings by demonstrating a (profitable in-sample) self-financed option trading strategy that is based on the quality of the accounting information released on earnings announcement days.     

Earnings Announcements, Asymmetric Information, Trades and Quotes

This paper empirically analyses trades and quotes around the times of 37 earnings announcements in the Paris Bourse. We find that trading volume is larger on announcement days, spreads are wider after announcements, and the permanent positive (resp. negative) price impact of purchases (sales) is greater around announcements. While the findings pertaining to the spread and the permanent impact of trades are consistent with the view that earnings announcements correspond to an increase in information asymmetries, the result that trading volume is larger suggests that other effects are at work.     

Earnings seasonality,management earnings forecasts and stock returns

We examine whether management earnings forecasts (MEFs) help reduce the stock return seasonality associated with earnings seasonality around earnings announcements (EAs) in Chinese A-share markets. We find that firms in historically low earnings seasons outperform firms in high earnings seasons by 2.1% around MEFs. Firms in low earnings seasons also have higher trading volume and return volatility than their counterparts around EAs and MEFs. MEFs significantly reduce the ability of historical seasonal earnings rankings to negatively predict announcement returns, volume and volatility around EAs. The reduction effects are stronger when MEFs are voluntary or made closer to EAs. The evidence suggests that MEFs facilitate the correction of investors’ tendency to extrapolate earnings seasonality and its resulted stock mispricing.     

Insider trading,stock return volatility,and the option market's pricing of the information content of insider trading

We find strong evidence that net insider selling is positively associated with future stock return volatility, consistent with insider selling increasing outside investors’ uncertainty. The positive effect of net insider selling is significantly stronger when the volatility is measured around the earnings announcement. Apparently, option prices do not fully reflect the information content of insider trading for future volatility. More specifically, we find no evidence that option traders adjust the implied volatility for the insider trading effect in a timely manner. Consequently, net insider selling is significantly associated with future option straddle returns and delta neutral returns.     

Market Sidedness: Insights into Motives for Trade Initiation

We infer motives for trade initiation from market sidedness. We define trading as more two-sided (one-sided) if the correlation between the number of buyer- and seller-initiated trades increases (decreases), and assess changes in sidedness (relative to a control sample) around events that identify trade initiators. Consistent with asymmetric information, trading is more one-sided before merger news. Consistent with belief heterogeneity, trading is more two-sided before earnings and macro announcements with greater dispersion in analyst forecasts, and after news with larger announcement surprises. We examine the codeterminacy of sidedness, bid-ask spread, volatility, number of trades, and order imbalance.     

U.S. and Japanese macroeconomic news and stock market volatility in Asia-Pacific

I use a new comprehensive dataset to analyze the impact of ten U.S. and six Japanese macroeconomic announcements on stock market volatility in Japan, Hong Kong, South-Korea and Australia. A GARCH model that allows for multiplicative announcement effects and asymmetries is employed. Overnight conditional variances are significantly higher on announcement days and significantly lower on days before and after announcements, especially for U.S. news. The impact of announcements on implied volatilities, in contrast, is much weaker. Out-of-sample trading strategies that systematically buy delta-neutral straddles on announcement days generate statistically significant profits, but these disappear after transaction costs are taken into account.     

Early Movers Advantage? Evidence from Short Selling during After‐Hours on Earnings Announcement Days

We examine short sellers’ after‐hours trading (AHT) following quarterly earnings announcements released outside of the normal trading hours. Our innovation is to use the actual short trades immediately after the announcements. We find that on these earnings announcement days, there is significant shorting activity in AHT relative to shorting activity both during AHT on nonannouncements days and during regular trading sessions around announcements. Short sellers who trade after‐hours on announcement days earn an excess return of 0.82% and 1.40% during before‐market‐open (BMO) and after‐market‐close (AMC)sessions, respectively. The magnitude of these returns increases to 1.48 (3.92%) for BMO (AMC) earnings announcements with negative surprise. We find that the reactive short selling during AHT has information in predicting future returns. Short sellers’ trades have no predictive power if they wait for the market to open to trade during regular hours. In addition, we find that the weighted price contribution during AHT increases with an increase in after‐hours short selling. Overall, our results suggest that short sellers in AHT are informed. Our findings remain robust using alternative holding periods and after controlling for macroeconomic news announcements during BMO sessions.     

The impacts of futures trading on volatility and volatility asymmetry of Bitcoin returns

The impact of Bitcoin futures introduction on the underlying Bitcoin volatility has been a controversial topic. Conflicting results had been obtained from different sample periods and methodologies. To address this debate, this study examines the impact of futures trading on volatility and volatility asymmetry of Bitcoin returns in the short and long run. Using exponential GARCH models, we introduce a dummy in the variance equation to capture the changes in the volatility after the introduction of Bitcoin futures. We find that after the introduction, spot return volatility decreases in the short run, but increases in the long run. Besides, in the short run, there exists an inverse leverage effect before and after the introduction; in the long run, the inverse leverage effect before the introduction changes to a usual level effect after the introduction. Finally, we examine whether greater futures trading activity, proxied by trading volume and open interest, is associated with greater Bitcoin volatility. To do so, we decompose each proxy into expected and unexpected components and document that, in the long run, Bitcoin volatility covaries positively with unexpected futures trading volume, but negatively with unexpected futures open interest.     

Volatility spreads and earnings announcement returns

Prior research documents that volatility spreads predict stock returns. If the trading activity of informed investors is an important driver of volatility spreads, then the predictability of stock returns should be more pronounced during major information events. This paper investigates whether the predictability of equity returns by volatility spreads is stronger during earnings announcements. Volatility spreads are measured by the implied volatility differences between pairs of strike price and expiration date matched put and call options and capture price pressures in the option market. During a two-day earnings announcement window, the abnormal returns to the quintile that includes stocks with relatively expensive call options is more than 1.5% greater than the abnormal returns to the quintile that includes stocks with relatively expensive put options. This result is robust after measuring volatility spreads in alternative ways and controlling for firm characteristics and lagged equity returns. The degree of announcement return predictability is stronger when volatility spreads are measured using more liquid options, the information environment is more asymmetric, and stock liquidity is low.     

Bid-ask Spreads, Trading Volume and Volatility: Intra-day Evidence from the London Stock Exchange

This paper examines intra-day variations in the bid-ask spread, volatility and volume for stocks traded on the London Stock Exchange. The data set used consists of quote and transactions data for a large sample of 835 stocks traded during the first quarter of 1991. The focus of the study is twofold; first, is to document a number of stylized facts regarding the intra-day behaviour of spread, trading volume, volatility etc. Second, the paper tests some predictions of two theoretical models of intra-day behaviour: the Admati and Pfleiderer and the Brock and Kleidon models. In addition, the paper also studies qualitatively the intra-day behaviour of several variables of interest including volume per transaction, transactions per fifteen-minute interval and spreads/trading volume for stocks of differing liquidity. The results suggest that the bid-ask spread is wide at the open, constant through the day and rises slightly at the close. Trading volume, in contrast is not highest at the open and the close. Volatility, based on the mid-point of the inside spread, shows a U-shaped pattern. Volume per transaction, in contrast, is fairly constant throughout the day. Further, the intra-day trading volume pattern differs for liquid and illiquid stocks. The results provide mixed support for current theoretical models of intra-day behaviour of spread, volume and volatility on the London Stock Exchange     

Local investor attention and post-earnings announcement drift

We show that local investor attention, as a proxy for the arrival rate of informed trading, has an impact on post-earnings announcement drift. Measured by monthly abnormal Google search volume before the earnings announcement, high (low) local investor attention is associated with weak (strong) delayed market reaction to the earnings announcement and strong (weak) abnormal trading volume in the pre-earnings announcement period. The evidence documented in this paper supports both “rational structural uncertainty” and attention allocation theories that argue that information distribution among investors plays an important role in explaining market anomalies.     

Evolution of market uncertainty around earnings announcements

This paper investigates theoretically and empirically the dynamics of the implied volatility or implied standard deviation (ISD) around earnings announcements dates. The volatility implied by option prices can be interpreted as the level of volatility expected by the market over the remaining life of the option. We propose a theoretical framework for the evolution of the ISD that takes into account two well-known features of the instantaneous volatility: volatility clustering and the leverage effect. In this context, the ISD should decrease after an earnings announcement but the post-announcement ISD path depends on the content of the earnings announcement: good news or bad news. An empirical investigation is conducted on the Swiss market over the period 1989–1998.     

Who Trades Around Earnings Announcements? Evidence from TORQ Data

Abstract:  Using TORQ database we investigate the intra-day trading volume reactions to earnings announcements of five trader groups, individuals, institutions, exchange members, program traders, and specialists. The results of this study indicate that institutions are most active in the immediate aftermath of an announcement. Individual investors are slow at the beginning but accumulate heavy volume afterwards and exceed institutional trading volume. We find support for Harris and Raviv (1993) and Admati and Pfleiderer (1988) , who respectively argue that divergence of opinion about a public information and portfolio rebalancing cause surges in pre- and post-announcement trading volume. Further we find evidence of swift and aggressive trading by informed and sophisticated institutions in the immediate aftermath of the announcement, and delayed, aggressive trading volume 'overreaction' by 'slow' and 'overconfident' individual investors as documented by Barber and Odean (2000 and 2002) and Daniel et al. (1998) . NYSE specialists provide the bulk of the liquidity needs around earnings announcements.     

WHEN‐ISSUED SHARES,SMALL TRADES,AND THE VARIANCE OF RETURNS AROUND STOCK SPLITS

The increases in volatility after stock splits have long puzzled researchers. The usual suspects of discreteness and bid‐ask spread do not provide a complete explanation. We provide new clues to solve this mystery by examining the trading of when‐issued shares that are available before the split. When‐issued trading permits noise traders to compete with a more homogenous set of traders, decreasing the volatility of the stock before the split. Following the split, these noise traders reunite in one market and volatility increases. Thus, the higher volatility after the ex date of a stock split is a function of the introduction of when‐issued trading, the new lower price level after the split date, and the increased activity of small‐volume traders around a stock split.     

The price discovery of day trading activities in futures market

Access to information is necessary for market transparency. However, contrary to trading volume and open interest, information related to day trading activities is rarely available. By incorporating unexplored day trading volume in the literature, this paper demonstrates that both the expected open interest and expected day trading volume are consistently and positively correlated with returns, but that one-lagged day trading volume is negatively correlated with futures returns. Meanwhile, both expected and unexpected day trading volume are negatively correlated with volatility, suggesting that arbitrage activities related to unexpected day trading volume may accelerate the movement of futures prices to a new equilibrium. Moreover, open interest provides liquidity but increases volatility. Finally, we strongly suggest that day trading transaction information be released by futures exchanges to achieve greater transparency.     

Options trading volume and stock price response to earnings announcements

We examine the effect of options trading volume on the stock price response to earnings announcements over the period 1996–2007. Contrary to previous studies, we find no significant difference in the immediate stock price response to earnings information announcements in samples split between firms with listed options and firms without listed options. However, within the sample of firms with listed options stratified by options volume, we find that higher options trading volume reduces the immediate stock price response to earnings announcements. This conforms with evidence that stock prices of high options trading volume firms have anticipated and pre-empted some earnings information in the pre-announcement period. We also find that higher abnormal options trading volume around earnings announcements hastens the stock price adjustment to earnings news and reduces post-earnings announcement drift.     

Volatility Information Trading in the Option Market

This paper investigates informed trading on stock volatility in the option market. We construct non-market maker net demand for volatility from the trading volume of individual equity options and find that this demand is informative about the future realized volatility of underlying stocks. We also find that the impact of volatility demand on option prices is positive. More importantly, the price impact increases by 40% as informational asymmetry about stock volatility intensifies in the days leading up to earnings announcements and diminishes to its normal level soon after the volatility uncertainty is resolved.     

The Determinants of Implied Volatility: A Test Using LIFFE Option Prices

This paper presents and tests a model of the volatility of individual companies' stocks, using implied volatilities derived from option prices. The data comes from traded options quoted on the London International Financial Futures Exchange. The model relates equity volatilities to corporate earnings announcements, interest-rate volatility and to four determining variables representing leverage, the degree of fixed-rate debt, asset duration and cash flow inflation indexation. The model predicts that equity volatility is positively related to duration and leverage and negatively related to the degree of inflation indexation and the proportion of fixed-rate debt in the capital structure. Empirical results suggest that duration, the proportion of fixed-rate debt, and leverage are significantly related to implied volatility. Regressions using all four determining variables explain approximately 30% of the cross-sectional variation in volatility. Time series tests confirm an expected drop in volatility shortly after the earnings announcement and in most cases a positive relationship between the volatility of the stock and the volatility of interest rates.     

Informed Options Trading Prior to Dividend Change Announcements

This paper investigates the information content of options trading prior to dividend change announcements. I find a positive (negative) relation between pre‐announcement abnormal implied volatility (IV) spread (abnormal IV skew) and cumulative abnormal stock returns around dividend change announcements. The predictive power of informed options trading is stronger for announcements of dividend reduction and when the options market is more liquid relative to the stock market and weaker when information has already been incorporated in the stock market. The predictability of informed options trading is robust to a placebo test and alternative measures of informed options trading. Overall results suggest that informed options trading predicts dividend change announcement returns.     

Regulation Fair Disclosure and Earnings Information: Market, Analyst, and Corporate Responses

With the adoption of Regulation Fair Disclosure (Reg FD), market behavior around earnings releases displays no significant change in return volatility (after controlling for decimalization of stock trading) but significant increases in trading volume due to difference in opinion. Analyst forecast dispersion increases, and increases in other measures of disagreement and difference of opinion suggest greater difficulty in forming forecasts beyond the current quarter. Corporations increase the quantity of voluntary disclosures, but only for current quarter earnings. Thus, Reg FD seems to increase the quantity of information available to the public while imposing greater demands on investment professionals.