Options and Earnings Announcements: An Empirical Study of Volatility, Trading Volume, Open Interest and Liquidity

Posted: 17 Jun 2000

See all articles by Monique W.M. Donders

Monique W.M. Donders

MeesPierson Investment Bank

Roy Kouwenberg

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Mahidol University - College of Management

Ton Vorst

VU University Amsterdam - Department of Finance and Financial Sector Management; Tinbergen Institute

Abstract

In this paper we study the impact of earnings announcements on trading volume, open interest and spreads in the stock option market. We find that option volume is higher around announcement days, even if we correct for stock volume and the expected future volatility of stock returns. Results in the pre-event period are different for good and bad news samples, indicating that option traders have access to (possibly short lived) private information. During the days before the announcements open interest tends to increase. After the earnings news dissemination traders seem to lose interest in the contracts and cancel part of their option positions thereby reducing open interest to normal levels. Analysis of quoted spreads provide no evidence of dealers' anticipation of higher information asymmetry in the pre- or post announcement period. However, results for effective spreads indicate that the transaction costs are higher on the announcement day itself and on the day immediately following the earnings dissemination. Both quoted and effective spreads are shown to respond to changes in trading volume and expected return variability.

Keywords: Earnings Announcements, Volatility, Volume, Spreads, Open Interest

JEL Classification: G13, G14

Suggested Citation

Donders, Monique W.M. and Kouwenberg, Roy R. P. and Vorst, Ton A.C.F., Options and Earnings Announcements: An Empirical Study of Volatility, Trading Volume, Open Interest and Liquidity. Available at SSRN: https://ssrn.com/abstract=231230

Monique W.M. Donders

MeesPierson Investment Bank

P.O. Box 243
Derivatives Research
1000 AE Amsterdam
Netherlands

Roy R. P. Kouwenberg (Contact Author)

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Mahidol University - College of Management ( email )

69 Vipawadee Rangsit Road
Bangkok, 10400
Thailand

HOME PAGE: http://https://www.cm.mahidol.ac.th/web/index.php/18-faculty/148-roy-kouwenberg-ph-d-cfa

Ton A.C.F. Vorst

VU University Amsterdam - Department of Finance and Financial Sector Management ( email )

De Boelelaan 1105
NL-1081HV Amsterdam
Netherlands

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

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