This paper investigates theoretically and empirically the dynamic of the implied volatility (ISD) around earnings announcements dates. The volatility implied in option prices can be interpreted as the market expected level of volatility over the remaining life of the option. In this framework the paper proposes a theoretical model of the evolution of the ISD that takes into account two well-known features of the instantaneous volatility: volatility clustering and the leverage effect. The model indicates that the ISD should decrease after an earnings announcement except after a bad news where it should be stable or even increase. An empirical investigation is conducted on the Swiss market over the period 1989-1998. The results confirm the main implications of the theoretical framework.
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Find related papers by JEL classification: G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
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