Volatility Forecasting Using Financial Statement Information

2015 ◽  
Vol 90 (5) ◽  
pp. 2079-2106 ◽  
Author(s):  
Suhas A. Sridharan
Keyword(s):  
Implied Volatility ◽  
Abnormal Returns ◽  
Analytical Framework ◽  
Realized Volatility ◽  
Financial Statement ◽  
Forecast Errors ◽  
Main Hypothesis ◽  
Fundamental Information ◽  
Variance Risk ◽  
Future Realized Volatility

ABSTRACT This paper examines whether financial statement information can predict future realized equity volatility incremental to market-based equity volatility forecasts. I use an analytical framework to identify accounting-based drivers of realized volatility. My main hypothesis is that accounting-based drivers can be used to forecast future realized volatility incremental to either past realized volatility or option-implied volatility. I confirm this empirically and document abnormal returns to an option-based trading strategy that takes a long (short) position in firms with financial statement information indicative of high (low) future realized volatility. These results suggest that accounting-based volatility drivers may serve as useful indicators of variance risk. Finally, I demonstrate that the incorporation of accounting-based fundamental information into forecasting models yields lower forecast errors relative to models based solely on past realized volatility.

scholarly journals Predictability of OTC Option Volatility for Future Stock Volatility

2020 ◽  
Vol 12 (12) ◽  
pp. 5200
Author(s):  
Jungmu Kim ◽  
Yuen Jung Park
Keyword(s):  
Information Content ◽  
Unbiased Estimator ◽  
Implied Volatility ◽  
Realized Volatility ◽  
Stock Index ◽  
Options Market ◽  
Over The Counter ◽  
Index Options ◽  
Stock Volatility ◽  
Future Realized Volatility

This study explores the information content of the implied volatility inferred from stock index options in the over-the-counter (OTC) market, which has rarely been studied in the literature. Using OTC calls, puts, and straddles on the KOSPI 200 index, we find that implied volatility generally outperforms historical volatility in predicting future realized volatility, although it is not an unbiased estimator. The results are more apparent for options with shorter maturity. However, while implied volatility has strong predictability during normal periods, historical volatility is superior to implied volatility during a period of crisis due to the liquidity contraction of the OTC options market. This finding suggests that the OTC options market can play a role in conveying important information to predict future volatility.

The Use of DuPont Analysis by Market Participants

2008 ◽  
Vol 83 (3) ◽  
pp. 823-853 ◽  
Author(s):  
Mark T. Soliman
Keyword(s):  
Accounting Information ◽  
Abnormal Returns ◽  
Financial Statement ◽  
Delayed Response ◽  
Forecast Errors ◽  
Financial Statement Analysis ◽  
Forecast Revisions ◽  
Market Participants ◽  
Dupont Analysis ◽  
Asset Turnover

DuPont analysis, a common form of financial statement analysis, decomposes return on net operating assets into two multiplicative components: profit margin and asset turnover. These two accounting ratios measure different constructs and, accordingly, have different properties. Prior research has found that a change in asset turnover is positively related to future changes in earnings. This paper comprehensively explores the DuPont components and contributes to the literature along three dimensions. First, the paper contributes to the financial statement analysis literature and finds that the information in this accounting signal is in fact incremental to accounting signals studied in prior research in predicting future earnings. Second, it contributes to the literature on the stock market's use of accounting information by examining immediate and future equity return responses to these components by investors. Finally, it adds to the literature on analysts' processing of accounting information by again testing immediate and delayed response of analysts through contemporaneous forecast revisions as well as future forecast errors. Consistent across both groups of market participants, the results show that the information is useful as evidenced by associations between the DuPont components and stock returns as well as analyst forecast revisions. However, I find predictable future forecast errors and future abnormal returns indicating that the information processing does not appear to be complete. Taken together, the analysis indicates that the DuPont components represent an incremental and viable form of information about the operating characteristics of a firm.

scholarly journals A Sharpe-ratio-based measure for currencies

2015 ◽  
Vol 4 (1) ◽  
pp. 67 ◽  
Author(s):  
Javier Prado-Dominguez ◽  
Carlos Fernández-Herráiz
Keyword(s):  
Random Walk ◽  
Implied Volatility ◽  
Realized Volatility ◽  
Sharpe Ratio ◽  
Excess Return ◽  
Ex Ante ◽  
Market Expectations ◽  
Future Realized Volatility

The Sharpe Ratio offers an excellent summary of the excess return required per unit of risk invested. This work presents an adaptation of the ex-ante Sharpe Ratio for currencies where we consider a random walk approach for the currency behavior and implied volatility as a proxy for market expectations of future realized volatility. The outcome of the proposed measure seems to gauge some information on the expected required return attached to the “peso problem”.

scholarly journals The magic of an Allaisian appraisal: implied and historical volatility revisited the VIX: once bitten, twice shy?

2017 ◽  
Vol 1 (1) ◽  
pp. 63-74
Author(s):  
Bertrand MUNIER ◽  
Eric BARTHALON ◽  
Séverine MENGUY
Keyword(s):  
Implied Volatility ◽  
Rational Expectation ◽  
Efficient Market Hypothesis ◽  
Realized Volatility ◽  
Monetary Theory ◽  
Option Prices ◽  
Lost Work ◽  
Past Data ◽  
Larger Sample ◽  
Future Realized Volatility

Many contributions have dealt with the relation between implied and historical volatility in reference to the S&P100 index and on mostly limited samples of data. A large part of this literature finds that implied volatility defined directly from option prices is a biased estimator of future realized volatility, although some dissent has been expressed Christensen and Prabhala (1998). We investigate the issue on the larger market of the S&P500, using the VIX index as the measure of implied volatility and on a much larger sample (314 months), extending from January 1990 to December 2016. Our results are in line with most of the literature inasmuch as they invalidate the efficient market hypothesis. More originally, however, we use a time series analysis derived from Maurice Allais’s “lost” work on monetary theory and show that the VIX incorporates a subtle version of perceived and memorized past data – the “missing link” in relating implied to realized volatility - rather than reflecting any kind of “rational expectation” of future realized volatility. Incidentally, we show that the VIX seems to have been over-valued until the middle of the first decade of our century and to be since then averagely under-valued. Amazingly enough, this trend of affairs seems to be steadily confirmed by the financial market, which calls for additional research, even if we offer two possible explanations.

Investor Reaction to Auditors' Going Concern Emphasis of Matter: Evidence from a Natural Experiment

2018 ◽  
Vol 38 (2) ◽  
pp. 27-55 ◽  
Author(s):  
Jean Bédard ◽  
Carl Brousseau ◽  
Ann Vanstraelen
Keyword(s):  
Trading Volume ◽  
Natural Experiment ◽  
Abnormal Returns ◽  
Data Availability ◽  
Financial Statement ◽  
Regulatory Change ◽  
Price Response ◽  
Going Concern ◽  
Incremental Value ◽  
Investor Reaction

SUMMARY Using a “natural experiment” provided by a change in Canadian auditing standards requiring an emphasis of matter paragraph in the auditor's report (GC-EOM) when the financial statements include a going concern uncertainty disclosure (GC-FS), this paper examines the incremental investor reaction to the auditor's report over the related GC-FS. Conditioning on the linguistic severity of the GC-FS (weak and severe), we first document a negative price response to severe but not to weak GC-FS before the regulatory change. This implies that investors react to financial statement disclosures and account for their degree of interpretability in the absence of a GC-EOM. When the uncertainty disclosure is accompanied by a GC-EOM, we find incremental negative abnormal returns and lower abnormal trading volume only for weak GC-FS. Collectively, these findings imply that an emphasis of matter paragraph in the auditor's report can have incremental value to investors. JEL Classifications: M42; G12; G14. Data Availability: Data used are available from public sources identified in the study.

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