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The options market response to accounting earnings announcements

  • Truong, Cameron
  • Corrado, Charles
  • Chen, Yangyang

We examine the reaction of the equity options market to accounting earnings announcements over the period 1996–2008 using changes in implied volatility to measure the options market response to earnings news. We find that positive earnings surprises and positive profit announcements produce a larger uncertainty resolution than negative earnings surprises and loss announcements. We demonstrate an inverse relation between the change in implied volatility and earnings news in a three-day window immediately after an earnings announcement. We refer to the magnitude of this relation as the ‘options market earnings response coefficient’. This ‘options market earnings response coefficient’ is stronger for both bad news announcements and positive profit announcements. We do not find any significant relation between changes in implied volatility and earnings news in the pre- or post-announcement periods. We conclude that the options market efficiently absorbs earnings information.

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Article provided by Elsevier in its journal Journal of International Financial Markets, Institutions and Money.

Volume (Year): 22 (2012)
Issue (Month): 3 ()
Pages: 423-450

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Handle: RePEc:eee:intfin:v:22:y:2012:i:3:p:423-450
Contact details of provider: Web page: http://www.elsevier.com/locate/intfin

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