Option pricing of earnings announcement risks

Andrew Dubinsky, Michael Johannes*, Andreas Kaeck, Norman J. Seeger

*Corresponding author for this work

Research output: Contribution to JournalArticleAcademicpeer-review

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Abstract

This paper uses option prices to learn about the equity price uncertainty surrounding information released on earnings announcement dates. To do this, we introduce reduced-form models and estimators to separate price uncertainty about earnings announcements from normal day-to-day volatility. Empirically, we find strong support for the importance of earnings announcements. We find that the anticipated price uncertainty is quantitatively large, varies across time, and is informative about the future return volatility. Finally, we quantify the impact of earnings announcements on formal option pricing models.

Original languageEnglish
Pages (from-to)646-687
Number of pages42
JournalThe Review of Financial Studies
Volume32
Issue number2
Early online date22 May 2018
DOIs
Publication statusPublished - Feb 2019

Keywords

  • Earnings announcements
  • anticipated uncertainty
  • equity options
  • implied volatility

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