The Option Market Reaction to Bank Loan Announcements
Journal of Financial Services Research, Vol.53, No. (1), pp. 99-139, 2018
51 Pages Posted: 21 Mar 2016 Last revised: 24 Aug 2019
Date Written: March 19, 2016
In this study, we examine the options market reaction to bank loan announcements for the population of US firms with traded options and loan announcements during 1996-2010. We get evidence on a significant options market reaction to bank loan announcements in terms of levels and changes in short-term implied volatility and its term structure, and observe significant decreases in short-term implied volatility, and significant increases in the slope of its term structure as a result of loan announcements. Our findings appear to be more pronounced for firms with more information asymmetry, lower credit ratings and loans with longer maturities and higher spreads. Evidence is consistent with loan announcements providing reassurance for investors in the short-term, however, over longer time horizons, the increase in the TSIV slope indicates that investors become increasingly unsure over the potential risks of loan repayment or uses of the proceeds.
Keywords: bank loan announcements, option pricing, implied volatility, term structure of implied volatility
JEL Classification: G13, G14, G20, G21
Suggested Citation: Suggested Citation