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The role of implied volatility in liquidity provision

Author

Listed:
  • Daniel Cahill

    (UWA Business School, The University of Western Australia, Perth, WA, Australia)

  • Kingsley Fong

    (School of Banking and Finance, The University of New South Wales, Sydney, NSW, Australia)

  • Marvin Wee

    (Research School of Accounting, The Australian National University, Canberra, ACT, Australia)

  • Joey Wenling Yang

    (UWA Business School, The University of Western Australia, Perth, WA, Australia)

Abstract

This article examines the informational volatility – the permanent component of volatility that is driven by information – and its effect on stock liquidity provision. Using option-implied volatility as a proxy for informational volatility, our results show it has a significant negative influence on liquidity provision prior to earnings announcement even after controlling for trade-related market conditions. We find the effect of informational volatility only exists on the bid-side but not the ask-side of the order book. Further analysis suggests that the information contained in implied volatility concerns the future uncertainty of the underlying stock. JEL Classification: G12, G14, G30

Suggested Citation

  • Daniel Cahill & Kingsley Fong & Marvin Wee & Joey Wenling Yang, 2020. "The role of implied volatility in liquidity provision," Australian Journal of Management, Australian School of Business, vol. 45(1), pages 45-71, February.
    • Handle: RePEc:sae:ausman:v:45:y:2020:i:1:p:45-71
    DOI: 10.1177/0312896219833423
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Earnings announcement; implied volatility; liquidity provision; market depth;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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