Too Good to Be True? An Analysis of the Options Market's Reactions to Earnings Releases

19 Pages Posted: 30 Sep 2016

See all articles by Yan Lu

Yan Lu

University of Central Florida - College of Business Administration

Sugata Ray

University of Alabama - Department of Economics, Finance and Legal Studies

Multiple version iconThere are 2 versions of this paper

Date Written: July/August 2016

Abstract

Using option implied risk neutral return distributions before and after earnings announcements, we study the option market's reaction to extreme events over earnings announcements. While earnings announcements generally reduce short‐term uncertainty about the stock price, very good news does not reduce uncertainty and slightly bad news actually increases uncertainty. We also find that left tail probabilities decrease over earnings releases while right tail probabilities increase. We interpret these findings as evidence of maintained investor expectations that very good news is generally not released during earnings announcements, combined with skepticism in the form of lingering uncertainty at the release of such very good news.

Keywords: earnings announcements, uncertainty resolution, option implied distributions, tail risk

Suggested Citation

Lu, Yan and Ray, Sugata, Too Good to Be True? An Analysis of the Options Market's Reactions to Earnings Releases (July/August 2016). Journal of Business Finance & Accounting, Vol. 43, Issue 7-8, pp. 830-848, 2016, Available at SSRN: https://ssrn.com/abstract=2845603 or http://dx.doi.org/10.1111/jbfa.12214

Yan Lu (Contact Author)

University of Central Florida - College of Business Administration ( email )

PO Box 161400
Orlando, FL 32816
United States

Sugata Ray

University of Alabama - Department of Economics, Finance and Legal Studies ( email )

P.O. Box 870244
Tuscaloosa, AL 35487
United States

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