What can we learn from firm-level jump-induced tail risk around earnings announcements?

Liu, Mengxi (Maggie), Kam Fong Chan and Robert Faff

Journal of Banking & Finance, 2022, vol. 138, issue C

Abstract: In this study, we provide empirical evidence that firm-level jump-induced tail risk (measured by a jump-implied variance contribution index [JIVX]) prospectively predicts cross-sectional stock returns around earnings announcements. The effect size is nontrivial. A practical trading strategy that buys announcers with high pre-news JIVX values and sells announcers with low pre-news JIVX values, earns a net risk-adjusted average return of 82 basis points (bps) three days after the news release. Notably, the empirical success of the JIVX predictor is distinct from model-free implied skewness and kurtosis measures and withstands a battery of robustness checks.

Keywords: Tail risk; Jump-implied variance contribution index; Earnings announcements; Implied moments (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:138:y:2022:i:c:s0378426622000097

DOI: 10.1016/j.jbankfin.2022.106409

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