The Options Market Reaction to Bank Loan Announcements
Aikaterini C. Ferentinou,
Panagiotis A. Tsaousis and
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Aikaterini C. Ferentinou: University of Graz
Panagiotis A. Tsaousis: Athens University of Economics & Business (AUEB)
Journal of Financial Services Research, 2018, vol. 53, issue 1, No 4, 99-139
Abstract In this study, we examine the options market reaction to bank loan announcements for the population of US firms with traded options and loan announcements during 1996–2010. We get evidence on a significant options market reaction to bank loan announcements in terms of levels and changes in short-term implied volatility and its term structure, and observe significant decreases in short-term implied volatility, and significant increases in the slope of its term structure as a result of loan announcements. Our findings appear to be more pronounced for firms with more information asymmetry, lower credit ratings and loans with longer maturities and higher spreads. Evidence is consistent with loan announcements providing reassurance for investors in the short-term, however, over longer time horizons, the increase in the TSIV slope indicates that investors become increasingly unsure over the potential risks of loan repayment or uses of the proceeds.
Keywords: Bank loan announcements; Option pricing; Implied volatility; Term structure of implied volatility (search for similar items in EconPapers)
JEL-codes: G13 G14 G20 G21 (search for similar items in EconPapers)
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