The Impact of Annual Financial Report Announcements on Stock Implied Volatility: An Event Study Analysis

Abstract: This study addresses the question: Do financial reports contain new and relevant information that increases the implied volatility of stocks within the examined event window? To analyze this effect, I will employ the event study methodology. The analysis will focus on the information embedded in financial reports, assessed through financial ratios calculated from the data presented in these reports. Implied volatility is a measure representing the market's expectations of future price fluctuations for a stock or financial asset. Derived from option prices on the asset, it serves as a critical tool in risk management, market forecasting, asset pricing and portfolio management. One of the most widely used volatility measures is the VIX index, often referred to as the "fear gauge" of the market. This study will utilize an implied volatility index for each individual stock traded on the S&P 500. Data for this analysis will be drawn from a database constructed by Kliger and Rabinovich (2024), who developed two series of implied volatility measures for individual stocks using distinct methodologies. This measures improves upon previous approaches by reflecting the market's comprehensive assessment of total volatility (in variance terms). It incorporates a unique formula that accounts for all strike prices, expirations, option prices, and risk-free interest rates. Thus, the index provides a continuous and comprehensive assessment of expected volatility. Using the event study methodology, we can draw conclusions about market behavior in terms of rational decision-making and explore behavioral phenomena.