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.     

Earnings forecasts: the case for combining analysts’ estimates with a cross-sectional model

Review of Quantitative Finance and Accounting - We propose a novel method to forecast corporate earnings, which combines the accuracy of analysts’ forecasts with the unbiasedness of a...     

Expected stock returns,common idiosyncratic volatility and average idiosyncratic correlation

Motivated by Herskovic et al. (2016), we examine the role of the average idiosyncratic correlation (ICOR) in two types of markets: an emerging market and a developed market. Examining daily stock data from the Chinese stock market for the period 1995 to 2020 and from the US for the period 1926 to 2019, we adopt high-dimensional principal component analysis (PCA) and thresholding methods to re-estimate ICOR. We find that ICOR plays an important role in explaining the expected stock returns, as the common idiosyncratic volatility (CIV) does in Herskovic et al. (2016). ICOR has been neglected in the literature due to large estimation error in the idiosyncratic covariance matrix and our analysis provides evidence that ICOR is nonnegligible in both markets when we control for several common market factors. We show that the average idiosyncratic covariance, which is the numerator of ICOR, exhibits the same pattern as CIV. Furthermore, our regression analyses of expected stock returns in response to ICOR change in both markets show that, in contrast to the negative result for CIV, the stocks’ high risk exposure to ICOR change comes with a higher risk premium, perhaps because of the synchronized but disproportionate changes in the monthly idiosyncratic covariance and idiosyncratic volatility.     

From implied to spot volatilities

This paper is concerned with the relation between spot and implied volatilities. The main result is the derivation of a new equation which gives the dynamics of the spot volatility in terms of the shape and the dynamics of the implied volatility surface. This equation is a consequence of no-arbitrage constraints on the implied volatility surface right before expiry. We first observe that the spot volatility can be recovered from the limit, as the expiry tends to zero, of at-the-money implied volatilities. Then, we derive the semimartingale decomposition of implied volatilities at any expiry and strike from the no-arbitrage condition. Finally the spot volatility dynamics is found by performing an asymptotic analysis of these dynamics as the expiry tends to zero. As a consequence of this equation, we give general formulas to compute the shape of the implied volatility surface around the at-the-money strike and for short expiries in general spot volatility models.     

业绩预告披露与盈余管理研究

盈余管理存在的根本原因在于投资者与管理层之间的信息不对称。业绩预告作为上市公司未来经营成果、财务状况与现金流量的预测,在很大程度上会影响投资者对上市公司的评估及其投资决策。从业绩预告披露的特征方面出发,研究业绩预告披露与盈余管理之间的关系,包括业绩预告的性质、预告精确度、预告误差分别与盈余管理程度的关系,结果发现：发布业绩预告的公司,盈余管理水平更高。预告精确度以及预告期间与预测当期盈余管理水平正相关,预测误差与盈余管理水平负相关。当消息类型不同的时候,预测的强制性与否以及＂变脸＂对盈余管理水平的影响不同。结论支持了上市公司财务报告迎合业绩预告披露的说法。     

A tale of two volatilities

We show that there are two distinct ways to make volatility stochastic that are differentiated by their consequences for skewness. Most models in the literature have adopted the relatively tractable methodology of using stochastic time changes to engineer stochastic volatility. Unfortunately, this is also the one that can conflict with the relationship occasionally observed in markets between volatility and skewness. Research enhancing the tractability of the second approach to stochastic volatility based on scaling is called for.     

Mean-reversion properties of implied volatilities

In this paper, we present a new stylized fact for options whose underlying asset is a stock index. Extracting implied volatility time series from call and put options on the Deutscher Aktien index (DAX) and financial times stock exchange index (FTSE), we show that the persistence of these volatilities depends on the moneyness of the options used for its computation. Using a functional autoregressive model, we show that this effect is statistically significant. Surprisingly, we show that the diffusion-based stochastic volatility models are not consistent with this stylized fact. Finally, we argue that adding jumps to a diffusion-based volatility model help recovering this volatility pattern. This suggests that the persistence of implied volatilities can be related to the tails of the underlying volatility process: this corroborates the intuition that the liquidity of the options across moneynesses introduces an additional risk factor to the one usually considered.     

Sustained Earnings and Revenue Growth,Earnings Quality,and Earnings Response Coefficients

We show that firms reporting sustained increases in both earnings and revenues have (1) higher quality earnings and (2) larger earnings response coefficients (ERCs) in comparison to firms reporting sustained increases in earnings alone. With respect to earnings quality, firms with revenue-supported increases in earnings have more persistent earnings, exhibit less susceptibility to earnings management, and have higher future operating performance. With respect to response coefficients, firms with revenue-supported increases in earnings have both higher ERCs and lower book value response coefficients, consistent with the implications of the Ohlson (1995, Contemporary Accounting Research 12, 661–687) model.JEL Classification: G12, M41     

Firm life cycle and idiosyncratic volatility

This paper investigates the association between idiosyncratic volatility and firm life cycle stages. Since firm performance and availability of information vary across life cycle stages, and such variation affects uncertainty about future cash flows and stock returns, we argue that idiosyncratic volatility also varies across firm life cycle stages. Using US data, this study shows that idiosyncratic volatility is significantly higher in the introduction and decline stages, and significantly lower in the growth and mature stages, when compared to that in the shake-out stage. Our study also reveals that the roles of both cash flow volatility and information uncertainty in affecting idiosyncratic volatility vary depending on firm life cycle stages. Our results are robust to alternative specifications of life cycle proxies and idiosyncratic volatility, and to an alternative regression specification.     

A geometric treatment of time-varying volatilities

In this article, we propose a new framework for addressing multivariate time-varying volatilities. By employing methods of differential geometry, our model respects the geometric structure of the covariance space, i.e., symmetry and positive definiteness, in a way that is independent of any local coordinate parametrization. Its parsimonious specification makes it particularly suitable for large dimensional systems. Simulation studies suggest that our model embraces much of the nonlinear behaviour of the covariance dynamics. Applied to the US and the UK stock markets, the model performs well, especially when applied to risk measurement. In a broad context, our framework presents a new approach treating nonlinear properties observed in the financial market, and numerous areas of application can be further considered.     

Non-GAAP Earnings and the Earnings Quality Trade-off

Using a large sample of earnings press releases by Australian firms, we compare multiple attributes of non-GAAP earnings measures with their closest GAAP equivalent. We find that, on average, non-GAAP earnings are more persistent, smoother, more value relevant, and have higher predictive power than their closest GAAP equivalent. However, the same set of non-GAAP earnings disclosures are also less conservative and less timely than their closest GAAP equivalent. The results are consistent with non-GAAP earnings measures reflecting a reversal of the trade-off between the valuation and stewardship roles of accounting inherent in accounting standards and the way they are applied. We also find that differences in several of these attributes between GAAP and non-GAAP earnings are more evident in larger firms, firms with lower market-to-book ratios, firms with a higher proportion of independent directors, and firms that report profits rather than losses. Our evidence is consistent with the argument that accounting standards impose significant amounts of conditional conservatism at some cost to the valuation role of accounting information. Non-GAAP earnings measures can therefore be seen as a response to the challenges faced by a single GAAP performance measure in satisfying the competing demands of value relevance and stewardship.     

Earnings Co-movements and the Informativeness of Earnings

We examine the informativeness of earnings in the presence of earnings co-movements. Many theoretical studies infer that the more a firm's earnings move with the market the less weight investors need to place on those earnings, thus rendering them less informative. On the other hand, managers have less opportunity to bias the earnings signal the more earnings co-move, making them more reliable. We measure earnings co-movement using an industry–firm pairing correlational technique. Overall our results show both the degree of co-movement and the ordering of earnings announcements impacts on the informativeness of earnings as indicated by earnings response coefficients. Earnings responses are larger for firms that report earnings before their most highly correlated industry peer, but the responses are reduced as earnings co-movement increases. We interpret our results to indicate that the more earnings co-move with an industry peer the less informative earnings become, but only when the peer firm is able to obtain information at a later date.     

Forward rate models with linear volatilities

The existence of solutions to the Heath?CJarrow?CMorton equation of the bond market with linear volatility and general Lévy random factor is studied. Conditions for the existence and non-existence of solutions in the class of bounded fields are presented. For the existence of solutions, the Lévy process should necessarily be without a Gaussian part and without negative jumps. If this is the case, then necessary and sufficient conditions for the existence are formulated either in terms of the behavior of the Lévy measure of the noise near the origin or the behavior of the Laplace exponent of the noise at infinity.     

24-Hour realized volatilities and transatlantic volatility interdependence

This paper proposes an innovative econometric approach for the computation of 24-h realized volatilities across stock markets in Europe and the US. In particular, we deal with the problem of non-synchronous trading hours and intermittent high-frequency data during overnight non-trading periods. Using high-frequency data for the Euro Stoxx 50 and the S&P 500 Index between 2003 and 2011, we combine squared overnight returns and realized daytime variances to obtain synchronous 24-h realized volatilities for both markets. Specifically, we use a piece-wise weighting procedure for daytime and overnight information to take into account structural breaks in the relation between the two. To demonstrate the new possibilities that our approach opens up, we use the new 24-h volatilities to estimate a bivariate extension of Corsi et al.’s [Econom. Rev., 2008, 27(1–3), 46–78] HAR-GARCH model. The results suggest that the contemporaneous transatlantic volatility interdependence is remarkably stable over the sample period.     

Trend in aggregate idiosyncratic volatility

We suggest that price interaction among stocks is an important determinant of idiosyncratic volatility. We demonstrate that as more (less) stocks are listed in the markets, price interaction among stocks increases (decreases), and hence stocks, on average, become more (less) volatile. Our results show that price interaction has a significant positive effect of idiosyncratic volatility. The results of various robustness checks indicate that the effect of price interaction is still significant to the presence of liquidity, newly listed firms, cash flow variables, business cycle variables, and market volatility. Once the price interaction effect is taken into account, no trend remains in idiosyncratic volatility. We conclude that there is no trend, but a reflection of the positive effect of price interaction on idiosyncratic volatility.     

Dissecting the idiosyncratic volatility anomaly

The idiosyncratic volatility (IVOL) anomaly, documented in Ang, et al. (2006), has garnered a great deal of attention in the literature. Yet questions remain regarding the robustness and pervasiveness of the IVOL anomaly, with a particular concern that the IVOL anomaly might simply be the manifestation of market microstructure effect. In this paper, we show that the IVOL anomaly is strong and pervasive after we exclude stocks most susceptible to market microstructure noise — such as microcap stocks, penny stocks, and stocks with strong short-term return reversal. These results are robust to equal-weighting or value-weighting stocks in the IVOL portfolios. Our findings suggest that rather than being the cause of the anomaly, market microstructure noise actually weakens the IVOL anomaly.     

Financial reporting quality and idiosyncratic return volatility

Campbell et al. (2001) document that firms’ stock returns have become more volatile in the U.S. since 1960. We hypothesize and find that deteriorating earnings quality is associated with higher idiosyncratic return volatility over 1962–2001. These results are robust to controlling for (i) inter-temporal changes in the disclosure of value-relevant information, sophistication of investors and the possibility that earnings quality can be informative about future cash flows; (ii) stock return performance, cash flow operating performance, cash flow variability, growth, leverage and firm size; and (iii) new listings, high-technology firms, firm-years with losses, mergers and acquisitions and financial distress.     

Time-varying idiosyncratic risk and aggregate consumption dynamics

Long-term earnings losses for displaced workers are large and counter-cyclical. Similarly, the skewness of earnings growth rates is strongly pro-cyclical. This paper presents an incomplete markets business cycle model in which idiosyncratic risk varies over time in accordance with these empirical findings. These dynamics of idiosyncratic risk give rise to a cyclical precautionary savings motive that substantially raises the volatility of aggregate consumption growth. According to the model, idiosyncratic risk spiked during the Great Recession, leading to a substantial decline in aggregate consumption.     

Options markets, self-fulfilling prophecies, and implied volatilities

This paper answers the following often asked question in option pricing theory: if the underlying asset's price does not satisfy a lognormal distribution, can market prices satisfy the Black-Scholes formula just because market participants believe it should? In complete markets, if the underlying asset's objective distribution is not lognormal, then the answer is no. But, in an incomplete market, if the underlying asset's objective distribution is not lognormal and all traders believe it is, then the answer is yes! The Black-Scholes formula can be a self-fulfilling prophecy. The proof of this second assertion consists of generating an economy where self-confirming beliefs sustain the Black-Scholes formula as an equilibrium. An asymmetric information model is provided, where the underlying asset's price has stochastic volatility and drift. This model is distinct from the existing pricing models in the literature, and it provides new empirical implications concerning Black-Scholes implied volatilities and the bid/ask spread. Similar to stochastic volatility models, this model is consistent with the implied volatility “smile” pattern in strike prices. In addition, it is consistent with implied volatilities being biased predictors of future volatilities.     

The determinants of the model-free positive and negative volatilities

In this paper we analyze the role of macroeconomic and financial determinants in explaining stock market volatilities in the U.S. market. Both implied and realized volatility are computed model-free and decomposed into positive and negative components, thereby allowing us to compute directional volatility risk premia. We capture the behaviour of each component of implied volatility and risk premium in relation to their different determinants. The negative implied volatility appears to be linked more towards financial conditions variables such as uncertainty and geopolitical risk indexes, whereas positive implied volatility is driven more by macro variables such as inflation and GDP. There is a clear shift in importance from macro towards financial determinants moving from the pre towards the post financial crisis. A mixed frequency Granger causality approach uncovers causality relationships between volatilities and risk premia and macro variables and vice versa, a finding which is not detected with a conventional low frequency VAR model.