Information from Implied Volatility Comovements and Insider Trades
Publication Date
1-20-2022
Abstract
We investigate whether option prices reflect the degree to which managers’ private information is informative about future aggregate market returns. Using implied volatilities extracted from firm-specific and market-index options, we compute the comovement between the implied volatilities of the firm and the market index (IVC). We hypothesize that IVC captures the extent to which investors’ expectations about future information arrival at the firm level coincide with expectations about market level information flows. Using insider purchase intensity as a proxy for firms’ private information, we predict that the informativeness of managers’ private information with respect to future market returns will increase with IVC. We find that the association between insider stock purchases and future unexpected market returns significantly increases with IVC. Further, firms with higher IVC have stock returns that are more informative about future aggregate earnings and have stronger aggregate market reactions to their earnings announcements. This suggests that a firm’s implied volatility embeds important information about the nature of private information generated inside the firm.
Document Type
Article
Keywords
Volatility, Accounting Earnings, Macroeconomy, Insider Trading, Forecasting, Bellwether
Disciplines
Accounting
DOI
10.2139/ssrn.4013087
Source
SMU Cox: Accounting (Topic)
Language
English
