Pricing event risk : evidence from concave implied volatility curves

Lykourgos Alexiou (Athens University of Economics and Business), Amit Goyal (University of Lausanne and Swiss Finance Institute), Alexandros Kostakis (University of Liverpool Management School and University of Manchester), Leonidas Rompolis (Athens University of Economics and Business)

We document that implied volatility (IV) curves extracted from short-term equity options frequently become concave prior to the earnings announcement day (EAD) reflecting a bimodal risk-neutral distribution for the underlying stock price. Firms with concave IV curves exhibit significantly higher absolute stock returns on EAD and higher realized volatility after the announcement, as compared to firms with non-concave IV curves. Hence, concavity in the IV curve constitutes an ex-ante option-based signal for event risk in the underlying stock. Returns on delta-neutral straddles around EADs are significantly lower in the presence of concave IV curves, showing that investors pay a high premium to hedge against this event risk

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Year of publication:	2021
Authors:	Alexiou, Lykourgos ; Goyal, Amit ; Kostakis, Alexandros ; Rompolis, Leonidas
Publisher:	Geneva : Swiss Finance Institute
Subject:	Earnings Announcement \| Event Risk \| Risk-Neutral Distribution \| Implied Volatility Curve \| Volatilität \| Volatility \| Ankündigungseffekt \| Announcement effect \| Optionsgeschäft \| Option trading \| Optionspreistheorie \| Option pricing theory