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Measuring Risk Information

Author

Listed:
  • Smith, Kevin

    (Stanford U)

  • So, Eric C.

    (MIT)

Abstract

We develop a measure of how information events impact investors' perceptions of firms' riskiness. We derive this measure from an option-pricing model where investors anticipate an announcement containing information on the mean and variance of firms' future prices. We apply the measure to firms' earnings announcements and show it has many desirable properties: it predicts firms' return volatilities, risk-factor exposures, implied costs of capital, the timing of heightened volatility, and deterioration in fundamental performance, and outperforms textual-based proxies. Together, our study offers an approach for studying risk information conveyed by information events that is simple to implement and broadly applicable.

Suggested Citation

  • Smith, Kevin & So, Eric C., 2020. "Measuring Risk Information," Research Papers 3857, Stanford University, Graduate School of Business.
    • Handle: RePEc:ecl:stabus:3857
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    File URL: https://www.gsb.stanford.edu/gsb-cmis/gsb-cmis-download-auth/494306
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    Cited by:

    1. Beyer, Anne & Smith, Kevin C., 2021. "Learning about risk-factor exposures from earnings: Implications for asset pricing and manipulation," Journal of Accounting and Economics, Elsevier, vol. 72(1).
    2. Tom Adams & Thaddeus Neururer, 2020. "Earnings announcement timing, uncertainty, and volatility risk premiums," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(10), pages 1603-1630, October.

    More about this item

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • 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
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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