Accounting professor's article to be published in Journal of Empirical Finance
Wayne State University Mike Ilitch School of Business accounting professor Sung Gon Chung has had an article accepted for publication by the Journal of Empirical Finance, an A-ranked journal on the Ilitch Schools publications list.
The article, co-authored with Henock Louis of Penn State University, is titled "Earnings announcements and option returns." A full abstract is below.
Sung Gon Chung is an assistant professor of accounting in the Ilitch School. His work also has been published in the Journal of Accounting and Public Policy and the CPA Journal, top journals in the field.
While prior studies find that returns on option straddles are generally negative, we show that returns on straddles purchased prior to earnings announcements are actually positive. The earnings announcement impact is compounded when the pre-portfolio formation volatility is low (high) and the pre-expiration realized volatility is high (low). Apparently, the average option trader underestimates future volatility before forthcoming earnings announcements, particularly after a period of relatively low volatility, and overestimates future volatility after recent earnings announcements, particularly after a period of relatively high volatility. The overestimation of future volatility after recent earnings announcements also increases with the magnitude of the earnings surprise.