The Informational Content of Implied Volatility Around Stock Splits

53 Pages Posted: 3 Nov 2005

See all articles by Brandon Julio

Brandon Julio

Lundquist College of Business, University of Oregon

Qian Deng

University of Illinois at Urbana-Champaign

Date Written: September 2005

Abstract

Previous research has been mixed with respect to whether option implied volatility reflects market expectations about future realized volatility for the underlying asset. This paper uses a previously documented volatility increasing event, the stock split, to investigate the informational content in implied volatility around stock split announcements. We find that the time series profile of implied volatility around stock splits is consistent with the predictions of standard option pricing theory. Option market participants appear to revise their forecasts of future realized volatility permanently upward at the split announcement. In addition, we find that changes in implied volatility at the split announcement provide informative forecasts of changes in realized stock volatility at the ex-date. However, these forecasts are biased and inefficient as other known, firm-specific variables improve the forecasts of changes in realized volatility. The use of intra-daily realized volatility estimates rather than those based on daily observations significantly reduces the bias in predictive regressions.

Keywords: Implied Volatility, Stock Splits, Realized Volatility

JEL Classification: G13, G14

Suggested Citation

Julio, Brandon and Deng, Qian, The Informational Content of Implied Volatility Around Stock Splits (September 2005). Available at SSRN: https://ssrn.com/abstract=831144 or http://dx.doi.org/10.2139/ssrn.831144

Brandon Julio (Contact Author)

Lundquist College of Business, University of Oregon ( email )

1280 University of Oregon
Eugene, OR 97403
United States

Qian Deng

University of Illinois at Urbana-Champaign ( email )

601 E John St
Champaign, IL 61820
United States

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