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Evolution of Market Uncertainty around Earnings Announcements

Author

Listed:
  • Isakov, D.
  • Perignon, C.

Abstract

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's 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 accound 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 model.

Suggested Citation

  • Isakov, D. & Perignon, C., 1999. "Evolution of Market Uncertainty around Earnings Announcements," Papers 99.12, Ecole des Hautes Etudes Commerciales, Universite de Geneve-.
    • Handle: RePEc:fth:ehecge:99.12
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    2. Pei Peter Lung & Pisun Xu, 2014. "Tipping and Option Trading," Financial Management, Financial Management Association International, vol. 43(3), pages 671-701, September.
    3. Borochin, Paul A. & Cicon, James E. & DeLisle, R. Jared & Price, S. McKay, 2018. "The effects of conference call tones on market perceptions of value uncertainty," Journal of Financial Markets, Elsevier, vol. 40(C), pages 75-91.
    4. Nguyen, Hung T. & Truong, Cameron, 2018. "When are extreme daily returns not lottery? At earnings announcements!," Journal of Financial Markets, Elsevier, vol. 41(C), pages 92-116.
    5. Pascal Dumontier & Bernard Raffournier, 2002. "Accounting and capital markets: a survey of the European evidence," European Accounting Review, Taylor & Francis Journals, vol. 11(1), pages 119-151.
    6. Perico Ortiz, Daniel & Schnaubelt, Matthias & Seifert, Oleg, 2023. "A topic modeling perspective on investor uncertainty," FAU Discussion Papers in Economics 04/2023, Friedrich-Alexander University Erlangen-Nuremberg, Institute for Economics.
    7. Baik, Bok & Kang, Hyoung-Goo & Kim, Young Jun, 2013. "Volatility arbitrage around earnings announcements: Evidence from the Korean equity linked warrants market," Pacific-Basin Finance Journal, Elsevier, vol. 23(C), pages 109-130.
    8. Rebecca N. Hann & Heedong Kim & Yue Zheng, 2019. "Intra-industry information transfers: evidence from changes in implied volatility around earnings announcements," Review of Accounting Studies, Springer, vol. 24(3), pages 927-971, September.
    9. Ding, Ashley, 2021. "A state-preference volatility index for the natural gas market," Energy Economics, Elsevier, vol. 104(C).
    10. Rogers, Jonathan L. & Skinner, Douglas J. & Van Buskirk, Andrew, 2009. "Earnings guidance and market uncertainty," Journal of Accounting and Economics, Elsevier, vol. 48(1), pages 90-109, October.
    11. Tim Leung & Marco Santoli, 2014. "Accounting for earnings announcements in the pricing of equity options," Journal of Financial Engineering (JFE), World Scientific Publishing Co. Pte. Ltd., vol. 1(04), pages 1-46.
    12. Atilgan, Yigit, 2014. "Volatility spreads and earnings announcement returns," Journal of Banking & Finance, Elsevier, vol. 38(C), pages 205-215.
    13. Masazumi Hattori & Andreas Schrimpf & Vladyslav Sushko, 2016. "The Response of Tail Risk Perceptions to Unconventional Monetary Policy," American Economic Journal: Macroeconomics, American Economic Association, vol. 8(2), pages 111-136, April.
    14. Choi, Youngmin & Lee, Suzanne S., 2025. "On the efficiency contributions of analyst recommendations to financial markets," Journal of Financial Markets, Elsevier, vol. 75(C).
    15. Thaddeus Neururer & George Papadakis & Edward J. Riedl, 2016. "Tests of investor learning models using earnings innovations and implied volatilities," Review of Accounting Studies, Springer, vol. 21(2), pages 400-437, June.
    16. Truong, Cameron & Corrado, Charles & Chen, Yangyang, 2012. "The options market response to accounting earnings announcements," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(3), pages 423-450.
    17. Clements, A.E. & Liao, Y., 2020. "Firm-specific information and systemic risk," Economic Modelling, Elsevier, vol. 90(C), pages 480-493.

    More about this item

    Keywords

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    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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