The role of implied volatility in liquidity provision

Daniel Cahill, Kingsley Fong, Marvin Wee and Joey Wenling Yang
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Daniel Cahill: UWA Business School, The University of Western Australia, Perth, WA, Australia
Kingsley Fong: School of Banking and Finance, The University of New South Wales, Sydney, NSW, Australia
Marvin Wee: Research School of Accounting, The Australian National University, Canberra, ACT, Australia
Joey Wenling Yang: UWA Business School, The University of Western Australia, Perth, WA, Australia

Australian Journal of Management, 2020, vol. 45, issue 1, 45-71

Abstract: This article examines the informational volatility – the permanent component of volatility that is driven by information – and its effect on stock liquidity provision. Using option-implied volatility as a proxy for informational volatility, our results show it has a significant negative influence on liquidity provision prior to earnings announcement even after controlling for trade-related market conditions. We find the effect of informational volatility only exists on the bid-side but not the ask-side of the order book. Further analysis suggests that the information contained in implied volatility concerns the future uncertainty of the underlying stock. JEL Classification: G12, G14, G30

Keywords: Earnings announcement; implied volatility; liquidity provision; market depth (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:sae:ausman:v:45:y:2020:i:1:p:45-71

DOI: 10.1177/0312896219833423

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