The role of implied volatility in liquidity provision

Daniel Cahill; Kingsley Fong; Marvin Wee; Joey Wenling Yang

doi:10.1177/0312896219833423

The role of implied volatility in liquidity provision

Daniel Cahill, Kingsley Fong, Marvin Wee, Joey Wenling Yang^*

^*Corresponding author for this work

Research output: Contribution to journal › Article › peer-review

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.

Original language	English
Pages (from-to)	45-71
Number of pages	27
Journal	Australian Journal of Management
Volume	45
Issue number	1
DOIs	https://doi.org/10.1177/0312896219833423
Publication status	Published - 1 Feb 2020

Access to Document

10.1177/0312896219833423

Cite this

@article{e692ff4261ff44fd89e212cd8bfb32b1,

title = "The role of implied volatility in liquidity provision",

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",

author = "Daniel Cahill and Kingsley Fong and Marvin Wee and Yang, \{Joey Wenling\}",

note = "Publisher Copyright: {\textcopyright} The Author(s) 2019.",

year = "2020",

month = feb,

day = "1",

doi = "10.1177/0312896219833423",

language = "English",

volume = "45",

pages = "45--71",

journal = "Australian Journal of Management",

issn = "0312-8962",

publisher = "SAGE Publications",

number = "1",

}

TY - JOUR

T1 - The role of implied volatility in liquidity provision

AU - Cahill, Daniel

AU - Fong, Kingsley

AU - Wee, Marvin

AU - Yang, Joey Wenling

N1 - Publisher Copyright: © The Author(s) 2019.

PY - 2020/2/1

Y1 - 2020/2/1

N2 - 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.

AB - 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.

KW - Earnings announcement

KW - implied volatility

KW - liquidity provision

KW - market depth

UR - https://www.scopus.com/pages/publications/85064709292

U2 - 10.1177/0312896219833423

DO - 10.1177/0312896219833423

M3 - Article

SN - 0312-8962

VL - 45

SP - 45

EP - 71

JO - Australian Journal of Management

JF - Australian Journal of Management

IS - 1

ER -

The role of implied volatility in liquidity provision

Abstract

Access to Document

Other files and links

Fingerprint

Cite this