Systemic Risk Centre Seminar
Date: Monday, 20th March 2023
Time: 1.00 - 2.00pm GMT
Speaker: Alexandros Kostakis (University of Liverpool Management School, University of Manchester - Manchester Business School)
Seminar title: Pricing Event Risk: Evidence from Concave Implied Volatility Curves
Abstract: We document that implied volatility (IV) curves extracted from short-term equity options frequently become concave prior to the earnings announcement day (EAD) reflecting a bimodal risk-neutral distribution for the underlying stock price. Firms with concave IV curves exhibit significantly higher absolute stock returns on EAD and higher realized volatility after the announcement, as compared to firms with non-concave IV curves. Hence, concavity in the IV curve constitutes an ex-ante option-based signal for event risk in the underlying stock. Returns on delta-neutral straddles, delta-neutral strangles, and delta- and vega-neutral calendar straddles are all negative and significantly lower in the presence of concave IV curves, showing that investors pay a substantial premium to hedge against the gamma risk arising due to this event.
This is a public event, free and open to all but pre-registration is required. The mode of delivery will be confirmed shortly, along with registration details.