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Type of Document Dissertation Author Diavatopoulos, Constantine URN etd-05022008-164752 Title Two Essays on the Predictive Ability of Implied Volatility Degree Doctor of Philosophy Department Finance, Department of Advisory Committee
Advisor Name Title David Peterson Committee Chair Bruce Billings Committee Member Gary Benesh Committee Member James Doran Committee Member Thomas W. Zuehlke Committee Member Keywords
- Implied Volatility
- Idiosyncratic Volatility
- Portfolio Returns
Date of Defense 2008-04-03 Availability unrestricted Abstract This dissertation examines the information content of implied volatility with regard to future asset returns and future earnings announcements. By definition, implied volatility is the market’s best guess of the future volatility over the term of the option. Thus, the objective of my first essay is to investigate whether expected idiosyncratic risk (i.e. firm-specific risk as opposed to market risk), as measured from implied volatility, is related to future returns. I find a strong positive link between implied idiosyncratic volatility and future returns. It is also clear that historical realized idiosyncratic volatility is unimportant in the presence of implied idiosyncratic volatility. The robust results of my first essay motivate the idea that implied volatility might also contain information about future earnings. Therefore, in my second essay I examine whether information about earnings announcement surprises is imbedded in option prices (via implied volatility and the implied volatility skew) prior to the announcement. I find some limited support for this idea. In particular, the results of my second essay suggest that investors might profit by buying put options in low volatility skew firms 3, 10, 20, or even 30 days before the earnings announcement.Files
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