Using Option Implied Volatilities to Predict Absolute Stock Returns
Thu September 25, 2014
Evidence from Earnings Announcements and Annual Shareholders’ Meetings
Suresh Govindaraj, Rutgers Business School
Wen Jin, Quantitative Management Associates, LLC
Joshua Livnat, New York University Stern
Chen Zhao, Rutgers University
Wall Street Horizon Abstract
Using Wall Street Horizons’ quarterly earnings announcement dates and annual meeting of shareholders dates, the authors provide evidence that option implied volatility-based measures predict future excess returns for stocks. The greater volatility of excess returns around these event dates allow investors to take advantage of the additional liquidity. The larger excess returns increase the potential investment opportunity for informed investors.
The authors confirm that the option market correctly forecasts the magnitude of the sudden increase in uncertainty associated with these events and prices options correctly. They suggest that the information contained in the option implied volatility complements the historic volatility signals in predicting future uncertainty around information events.
Earnings announcements and shareholder meetings lead to greater volatility and excess returns around their scheduled dates. Investors who track these event dates can be rewarded with larger returns and increased liquidity.
Are you an academic interested in Wall Street Horizon data? Please contact us.
Note: While the academics listed made extensive use of Wall Street Horizon corporate events data, please note Wall Street Horizon does not sponsor academic research; all papers are conducted independently by the researchers and their teams at their respective organizations.