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The information content of implied skewness and kurtosis changes prior to earnings announcements for stock and option returns

Dean Diavatopoulos, James Doran (), Andy Fodor and David R. Peterson

Journal of Banking & Finance, 2012, vol. 36, issue 3, 786-802

Abstract: We use option prices to examine whether changes in stock return skewness and kurtosis preceding earnings announcements provide information about subsequent stock and option returns. We demonstrate that changes in jump risk premiums can lead to changes in implied skewness and kurtosis and are also associated with the mean and variability of the stock price response to the earnings announcement. We find that changes in both moments have strong predictive power for future stock returns, even after controlling for implied volatility. Additionally, changes in both moments predict call returns, while put return predictability is primarily linked to changes in skewness.

Keywords: Earnings announcements; Option prices; Higher-order moments (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2012
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DOI: 10.1016/j.jbankfin.2011.09.012

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Handle: RePEc:eee:jbfina:v:36:y:2012:i:3:p:786-802