Investor Expectations of Volatility Increases Around Large Stock Splits as Implied in Call Option Premia

Klein, Linda Schmid; Peterson, David R.

doi:10.1111/j.1475-6803.1988.tb00067.x

Cited by 10 publications

(4 citation statements)

References 24 publications

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“…(Mayhew, 1995: p. 13). The ISD measure has many advantages: it is a direct measure; it is objective in the sense it comes from the market, rather than forecasters or accounting items that could be manipulated; and, it has precedent in the financial literature as a measure of volatility in event-studies (Day & Lewis, 1988;Klein & Peterson, 1988;Levy & Yoder, 1993;Mayhew, 1995).…”

Section: Limitationsmentioning

confidence: 99%

Volatility-based Effects on Shareholder Value: Alliance Activity in the Computing Industry

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2004

Journal of Management

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We use an event-study analysis to understand how alliance activity affects firm risk. The risk measure is the implied volatility of a firm’s stock price and the events are alliance announcements to the market. We build on the previous event-studies in the alliance literature that focus on the change in shareholder value by taking the first step in delineating what part of that value arises from the changes in the firm’s risk. The analysis reveals that a number of factors within a firm’s control can be used to manipulate risk exposure in an alliance, including the similarity of the firm’s and the alliance’s core activities, the governance form of the alliance, and the function of the alliance.

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Section: Limitationsmentioning

confidence: 99%

Volatility-based Effects on Shareholder Value: Alliance Activity in the Computing Industry

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2004

Journal of Management

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“…Given an observed option price, share price, exercise price, time to expiration, and risk‐free rate, one can then solve for ISD. The financial literature has established the use of ISD as a measure of volatility in event studies already (Mayhew, 1995; Levy and Yoder, 1993; Klein and Peterson, 1988; Day and Lewis, 1988).…”

Section: An Options‐based Estimation Of the Risk Componentmentioning

confidence: 99%

Deconstructing market responses

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2009

Management Decision

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PurposeThe aim is to present, explain and illustrate an improved method for decomposing an event‐based change in market value into its cash flow and risk elements.Design/methodology/approachThe approach is two‐fold. There is an algebraic comparison of the existing and improved decomposition to prove and delineate the benefits of the new method. There is an event study, using 130 firms, contrasting the results of the existing and improved methods.FindingsThe new, alternative method of decomposition is easier to use, provides a cleaner delineation of the components, and results in increased statistical significance in tests.Research limitations/implicationsResearchers now have access to an improved methodology for decomposing market value changes. Explicit limitations reveal when the new method provides benefits over the current method.Practical implicationsManagers considering strategic decisions now have an improved method to understand the main impacts on market value. For example, by decomposing the market's reaction to an acquisition announcement, managers can gauge better whether following through that decision is likely to have intended effects on the firm's cash flow and risk profile.Originality/valueThe value of this paper is the presentation of an improved method for event‐study type research, where delineation of the basis elements of changes in market value is required. Originality lies in the use of implied standard deviation (ISD) as an even more focused way to apply this new method when the target firms regularly trade financial options.

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“…Other studies have looked at the effects of unscheduled announcements on implied volatility: ten major news announcements (Cornell, 1978), takeovers (Barone-Adesi, Brown & Harlow, 1994), mergers (Jayaraman et al, 1991, Levy & Yoder, 1993, interest rate changes (French & Fraser, 1986), the effect of the Louvre Accord on volatility in currency markets (Tucker & Madura, 1991), central bank intervention in the foreign exchange market (Bonser-Neal, 1996, Bonser-Neal & Tanner, 1996 and dividend increases (Jayaraman & Shastri, 1993). Finally, a few studies have looked at the announcement (unscheduled) and the ex-date (scheduled) effects of stock splits (French & Dubofsky, 1986, Klein & Peterson, 1988, Sheikh, 1989). …”

Section: The Effects Of Scheduled Announcements On Short Sterling Optmentioning

confidence: 99%

“…these studies have analysed various scheduled announcements, 19 while others have looked at the effects of unscheduled announcements on implied volatility. 20 Finally, a few studies have looked at the announcement (unscheduled) and the ex-date (scheduled) effects of stock splits (French & Dubofsky, 1986;Klein & Peterson, 1988;Sheikh, 1989).…”

Section: The Effects Of Scheduled Announcements On Short Sterling Optmentioning

confidence: 99%

Scheduled announcements and volatility patterns: The effects of monetary policy committee announcements on LIBOR and short sterling futures and options

Sun

Sutcliffe

2003

Journal of Futures Markets

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Both the UK spot and futures markets in short‐term interest rates are found to react strongly to surprises in the scheduled announcements of the repo rate and RPI. Therefore, these announcements should also affect the market for options on short‐term interest rate futures. Because the repo rate and RPI announcements are scheduled, the options market can predict the days on which announcement shocks may hit, and build this information into its volatility expectations. It is argued that the volatility used in pricing options should alter over time in a predictable nonlinear manner that varies with contract maturity and the number of forthcoming announcements; but is independent of announcement content. The empirical results support this hypothesis. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:773–797, 2003

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Investor Expectations of Volatility Increases Around Large Stock Splits as Implied in Call Option Premia

Cited by 10 publications

References 24 publications

Volatility-based Effects on Shareholder Value: Alliance Activity in the Computing Industry

Volatility-based Effects on Shareholder Value: Alliance Activity in the Computing Industry

Deconstructing market responses

Scheduled announcements and volatility patterns: The effects of monetary policy committee announcements on LIBOR and short sterling futures and options

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