Implied and realized volatility reaction to earnings announcements in German stock and derivatives market
Illi, Jukka (2006)
2006
Kuvaus
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Company related earnings announcements are the most relevant scheduled news releases regarding the future price of company’s stock and so on stock option. Modern investor has to be ready to react rapidly into new information entering the market, and to achieve profits the informational content of the release needs to be analyzed correctly. Nowadays most of the enterprises announce earnings announcements quarterly. The uncertainty between investors increases when closing these announcement days. The reason for this reaction is that the earnings announcement date is known in advance but the information content is not.
Purpose of this thesis is to investigate implied and realized volatility reaction to firm specific earnings announcements. Implied and realized volatilities are the measures of uncertainty regarding the security future price. This study concentrates on German a stock and derivatives market that ranks only behind U.K. in Europe what comes to trading volumes. Data sample consist five companies from different market sectors forming a portfolio to describe the whole German stock and derivatives market.
Uncertainty reaction to earnings announcements is estimated by using dummy variables in regression. The results show that, as earlier studies witnessed, the implied volatility increases before the announcement day and decreases rapidly into it’s normal level after the announcement takes place. Realized volatility behaves the opposite by increasing on an announcement day when prices start adjusting to new information. Implied volatility reactions to GOOD/BAD news show that GOOD news cause significant decrease on implied volatility. A primary result of this thesis is that earnings announcements consist highly relevant information regarding the future price of security in German markets.
Purpose of this thesis is to investigate implied and realized volatility reaction to firm specific earnings announcements. Implied and realized volatilities are the measures of uncertainty regarding the security future price. This study concentrates on German a stock and derivatives market that ranks only behind U.K. in Europe what comes to trading volumes. Data sample consist five companies from different market sectors forming a portfolio to describe the whole German stock and derivatives market.
Uncertainty reaction to earnings announcements is estimated by using dummy variables in regression. The results show that, as earlier studies witnessed, the implied volatility increases before the announcement day and decreases rapidly into it’s normal level after the announcement takes place. Realized volatility behaves the opposite by increasing on an announcement day when prices start adjusting to new information. Implied volatility reactions to GOOD/BAD news show that GOOD news cause significant decrease on implied volatility. A primary result of this thesis is that earnings announcements consist highly relevant information regarding the future price of security in German markets.