Implied Volatility Around Earnings...
Transcript of Implied Volatility Around Earnings...
Implied Volatility Around Earnings Announcements
MS&E 444June 4, 2007
Geoff EvansPablo Jadzinsky
Yu LauJane Wang
Ryan Williams
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Project Overview Are stock returns fat-tailed excluding days
around earnings?• Yes, but less so• Days within a 14 day window of earnings
announcements account for a substantial proportion of kurtosis
• Skewness / kurtosis coefficients change around earnings
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Project Overview How can we characterize implied volatility
of call options around earnings announcements?• Formal characterization framework• N=30 stocks, variety of industries / sectors• Varied time windows (30 to 180 days) • No clear patterns emerge across stocks
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IBM Daily Log-Returns
Kurtosis: 9.922
Skewness: .0146
Normal? p < .001
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Log-Returns Excluding Earnings
Kurtosis: 5.234
Skewness: .1095
Normal? p < .001
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S&P 500 Constituent Stocks
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S&P 500 Constituent Stocks
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Options Trades Near EarningsGoldman Sachs
Option with highest open interest
Volu
me
Impl
ied
Vola
tility
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Identifying Earnings Effects Problem: Too many variables changing
Need to isolate effects of earnings
Solution: Use moneyness to normalize for strike and expiration
Normalize implied volatilities as well for comparison over different stocks
TrTKSm
σ+
=)/ln(
atm
atm
σσσσ −
=~
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Normalized Volatility Surface
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Normalized Volatility Intensity Plot
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No Pattern Emerges
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No Pattern Emerges
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No Pattern Emerges
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Normalized Volume Surface
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Future Work Calculate moneyness based on fat-tailed
distributions
Put options, Small Cap stocks
Predict earnings outcomes based on options trading• Statistical pattern matching• Normalized implied volatility as a feature