Past managerial guidance and returns to variance trading around earnings announcements |
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Authors: | Thaddeus Neururer |
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Institution: | George W. Daverio School of Accountancy, University of Akron, Akron, OH, USA |
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Abstract: | I investigate the relationship between past managerial guidance and realized variance risk premiums (VRPs) – i.e., the difference between implied and realized variance – in equity options around earnings announcements. I find that implied variances are lower before earnings announcements but VRPs are higher when firms provide guidance. I also find higher option-implied jump risk when firms issue surprising guidance. Further tests suggest a portion of the higher VRPs are due to changes in perceived higher-order risks, but traders also underreact to the precision of information in short-term guidance. These results are attenuated for firms with a better information environment. |
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Keywords: | Management forecasts Options Implied volatility Variance risk premium Kurtosis |
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