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The Options Market Reaction to Bank Loan Announcements

Author

Listed:
  • Seraina C. Anagnostopoulou

    (University of Reading)

  • Aikaterini C. Ferentinou

    (University of Graz)

  • Panagiotis A. Tsaousis

    (Athens University of Economics & Business (AUEB))

  • Andrianos E. Tsekrekos

    (Athens University of Economics & Business (AUEB))

Abstract

In this study, we examine the options market reaction to bank loan announcements for the population of US firms with traded options and loan announcements during 1996–2010. We get evidence on a significant options market reaction to bank loan announcements in terms of levels and changes in short-term implied volatility and its term structure, and observe significant decreases in short-term implied volatility, and significant increases in the slope of its term structure as a result of loan announcements. Our findings appear to be more pronounced for firms with more information asymmetry, lower credit ratings and loans with longer maturities and higher spreads. Evidence is consistent with loan announcements providing reassurance for investors in the short-term, however, over longer time horizons, the increase in the TSIV slope indicates that investors become increasingly unsure over the potential risks of loan repayment or uses of the proceeds.

Suggested Citation

  • Seraina C. Anagnostopoulou & Aikaterini C. Ferentinou & Panagiotis A. Tsaousis & Andrianos E. Tsekrekos, 2018. "The Options Market Reaction to Bank Loan Announcements," Journal of Financial Services Research, Springer;Western Finance Association, vol. 53(1), pages 99-139, February.
    • Handle: RePEc:kap:jfsres:v:53:y:2018:i:1:d:10.1007_s10693-016-0243-4
    DOI: 10.1007/s10693-016-0243-4
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    More about this item

    Keywords

    Bank loan announcements; Option pricing; Implied volatility; Term structure of implied volatility;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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