Options and earnings announcements: an empirical study of volatility, trading volume, open interest and liquidity

In this paper we study the impact of earnings announcements on implied volatility, trading volume, open interest and spreads in the stock options market. We find that implied volatility increases before announcement days and drops afterwards. Also option trading volume is higher around announcement days. During the days before the announcement open interest tends to increase, while it returns to regular levels afterwards. Changes in the quoted spread largely respond to higher trading volume and changes in implied volatility. The effective spread increases on the event day and on the first two days following the earnings announcement.     

Price Formation and Liquidity in the U.S. Treasury Market: The Response to Public Information

The arrival of public information in the U.S. Treasury market sets off a two-stage adjustment process for prices, trading volume, and bid-ask spreads. In a brief first stage, the release of a major macroeconomic announcement induces a sharp and nearly instantaneous price change with a reduction in trading volume, demonstrating that price reactions to public information do not require trading. The spread widens dramatically at announcement, evidently driven by inventory control concerns. In a prolonged second stage, trading volume surges, price volatility persists, and spreads remain moderately wide as investors trade to reconcile residual differences in their private views.     

INTRADAY CHANGES IN TARGET FIRMS' SHARE PRICE AND BID-ASK QUOTES AROUND TAKEOVER ANNOUNCEMENTS

This paper documents changes in share prices, bid-ask spreads, and quote sizes for target firms during the day a takeover proposal is announced. The mean 21.2 percent announcement-day return consists primarily of a 19.5 percent return at the announcement. There is little evidence that spreads increase before the announcement, except when trading is suspended because of an order imbalance. Quote sizes show some sign of decreasing just before the announcement. The quoted bid-ask spread and size increase immediately after the announcement, but spreads quickly return to normal.     

Does Noninformative Text Affect Investor Behavior?

This article demonstrates that easily processed texts affect investor trading behavior even in the absence of any informational content. We examine the trading symbols of US firms and find that stocks with clever tickers (those that are actual words in the English language) are more liquid, as measured by higher turnover and trading volume, as well as lower spreads. Furthermore, clever ticker stocks are traded more by uninformed investors and have larger market reactions on earnings announcement days. These results suggest that ticker fluency facilitates trading by improving the firm's visibility among retail investors through attention grabbing and memorization.     

What Explains the Bid‐Ask Spread Decline after Nasdaq Reforms?

This paper examines whether the decrease in bid‐ask spreads on Nasdaq after the 1997 reforms is due to a decrease in market‐making costs and/or an increase in market competition for order flows. Unlike previous studies, we jointly examine how competition and trading costs affect bid‐ask spreads. In addition, we separate the effects of informed trading and liquidity costs on bid‐ask spreads. Informed trading cost is directly estimated for each Nasdaq stock using a Bayesian theoretic model. Empirical results show that market‐making costs and competition significantly affect bid‐ask spreads. The post‐reform decrease in bid‐ask spreads is largely due to both an increase in competition and a decrease in informed trading and liquidity costs on Nasdaq.     

The impact of informed trading on corporate liquidity

The purpose of this paper is to analyze the impact of informed trading on corporate liquidity. Although theory posits an inverse relation between informed trading and firm liquidity, there is relatively little evidence on precisely how this relation is established or maintained. The trading model of Easley et al. (J. Finance 51 (1996) 1405) is employed to estimate the probability of informed trading and to identify specific days of informed trading using posterior probabilities. The results show that corporate liquidity, both in terms of spreads and depths, is a decreasing function of the probability of informed trading. The main finding is that spreads narrow and depths increase on actual information days even after controlling for variations in price, volume, and volatility.     

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.     

Merger Announcements and Insider Trading Activity: An Empirical Investigation

This paper provides evidence of excess returns earned by investors in acquired firms prior to the first public announcement of planned mergers. The study is distinguished from earlier merger studies in its use of daily holding period returns for the 194 firms sampled. The results confirm statistically what most traders already know. Impending merger announcements are poorly held secrets, and trading on this nonpublic information abounds. Specifically, leakage of inside information is a pervasive problem occurring at a significant level up to 12 trading days prior to the first public announcement of a proposed merger.     

Trading on inside information: Evidence from the share-structure reform in China

We examine stock trading activities in days before Chinese listed firms made public announcement to start share-structure reform. There is significant evidence that, relative to a benchmark period, institutional investors bought more event firms’ shares in the last two trading days prior to announcement. Randomization tests show significant differences in institutional trading activities between event firms and matched control firms, which suggests that some institutions had inside information. Moreover, large trades account for a significant proportion of daily stock price changes in the last 2 days. The evidence is consistent with the prediction by Holden and Subrahmanyam (1992) that, when multiple informed investors acquire the same piece of information, they will trade aggressively. We also find that over the reform period, the median share value change of event firms is 6% higher than that of control firms. Our findings have important implications for enforcement of insider trading regulations in China.     

Liquidity Externalities and Adverse Selection: Evidence from Trading after Hours

This paper examines liquidity externalities by analyzing trading costs after hours. There is less than 1/20 as many trades per unit time after hours as during the trading day. The reduced trading activity results in substantially higher trading costs: quoted and effective spreads are three to four times larger than during the trading day. The higher spreads reflect greater adverse selection and order persistence, but not higher dealer profits. Because liquidity provision remains competitive after hours, the greater adverse selection and higher trading costs provide a direct measure of the magnitude of the liquidity externalities generated during the trading day.     

Multimarket trading and liquidity: a transaction data analysis of Canada–US interlistings

We use transaction data for Toronto Stock Exchange (TSE) listed stocks to examine the impact on trading costs of the decision to interlist on a US exchange. We measure trading costs using both ‘posted’ bid-ask spreads and ‘effective’ bid-ask spreads that measure actual transaction prices relative to standing bid-ask quotes. After controlling for price level, trade size and trading volume effects, we find that overall posted and effective spreads in the domestic (TSE) market decrease subsequent to the interlisting. However, the decrease in trading costs is concentrated in those TSE stocks that experience a significant shift of total trading volume (TSE and US) to the US exchange after listing. We interpret this result in the context of theories of multimarket trading as a competitive response by TSE market makers to the additional presence of US market makers.     

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.     

Informed Trading in Corporate Bonds Prior to Earnings Announcements

This paper examines the information content of corporate bond trading prior to earnings announcements using data from both NAIC and TRACE. We find that the direction of pre‐announcement bond trading is closely related to earnings surprises. This link is most evident prior to negative news and in high‐yield bonds. Further, abnormal bond trading during the pre‐announcement period can help predict both earnings surprises and post‐announcement bond returns. Such predictive ability of bond trading largely originates from institutional‐sized trades and is concentrated in the issuer's most actively traded bond. Finally, even after accounting for transactions costs, informed bond trading can generate significant net profits, especially prior to the release of bad news.     

Why do NASDAQ Market Makers Avoid Odd-Eighth Quotes?

The NASDAQ multiple dealer market is designed to produce narrow bid-ask spreads through the competition for order flow among individual dealers. However, we find that odd-eighth quotes are virtually nonexistent for 70 of 100 actively traded NASDAQ securities, including Apple Computer and Lotus Development. The lack of odd-eighth quotes cannot be explained by the negotiation hypothesis of Harris (1991) , trading activity, or other variables thought to impact spreads. This result implies that the inside spread for a large number of NASDAQ stocks is at least $0.25 and raises the question of whether NASDAQ dealers implicitly collude to maintain wide spreads.     

Prebid Run‐Ups Ahead of Canadian Takeovers: How Big Is the Problem?

This paper studies the price‐volume dynamics ahead of takeover announcements for 399 Canadian firms from 1985 to 2002. I find evidence consistent with insiders trading illegally, creating both abnormal returns (ARs) and abnormal turnover (AT) ahead of the announcement. The rise in AT begins far ahead of the actual announcement, accompanied by ARs in the last five trading days, consistent with more informed trading. Data on disclosed insider trading indicate a sharp increase in volume prior to the takeover announcement, suggesting that insiders make use of private information. This study confirms the importance of AT for triggering an insider trading investigation.     

PRICE AND QUANTITY QUOTES ON NASDAQ: A STUDY OF DEALER QUOTATION BEHAVIOR

We show that the majority of quotes posted by NASDAQ dealers are noncompetitive and only 19.5% (18.4%) of bid (ask) quotes are at the inside. The percentage of dealer quotes that are at the inside is higher for stocks with wider spreads, fewer market makers, and more frequent trading, and lower for stocks with larger trade sizes and higher return volatility. These results support our conjecture that dealers have greater incentives to be at the inside for stocks with larger market‐making revenues and smaller costs. Dealers post large depths when their quotes are at the inside and frequently quote the minimum required depth when they are not at the inside. The latter quotation behavior leads to the negative intertemporal correlation between dealer spread and depth.     

Very fast money: High-frequency trading on the NASDAQ

This paper provides evidence regarding high-frequency trader (HFT) trading performance, trading costs, and effects on market efficiency using a sample of NASDAQ trades and quotes that directly identifies HFT participation. I find that HFTs engage in successful intra-day market timing, spreads are wider when HFTs provide liquidity and tighter when HFTs take liquidity, and prices incorporate information from order flow and market-wide returns more efficiently on days when HFT participation is high.     

A change in market microstructure: the switch to electronic screen trading on the New Zealand stock exchange

The New Zealand Stock Exchange (NZSE) switched from open outcry trading to an electronic screen trading system on June 24, 1991. The change was made by the members of the exchange to improve the trading system and to reduce costs. This paper investigates empirically whether improvement was achieved through a reduction in transaction costs. The tests and results focus on order-flow migration to the exchange from alternative execution locations and changes in bid-ask spreads. On balance, we conclude that transaction costs have declined.     

Trading Activity,Trade Costs and Informed Trading for Acquisition Targets and Acquirers

Abstract

Microstructure effects of tender offer acquisitions on targets and acquirers differentiated by listing venue and payment method are examined. Trading activity increases more for targets than for acquirers upon offer announcement. Investors are more likely to sell targets upon announcement using direct market orders against ask limit orders for cash payment offers. While target liquidity improves as spread costs fall and quoted depths increase, acquirer liquidity falls continuously to successful offer completion. Due to increased trading differences, temporary trade costs fall more for targets than for acquirers. Permanent trade costs decline over the tender offer cycle for both parties, and especially for targets for cash tender offers and for acquirers for shares tender offers. The probability of informed trading declines (remains constant) for targets (acquirers) because increased trading intensity is greater (the same) for uninformed versus informed traders. As expected, abnormal returns and changes in own-firm permanent return volatility are negatively (but weakly) and positively (and strongly) related, respectively, to changes in information asymmetry upon announcement.     

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.