Do Markets Anticipate Changes in Risk after Major Corporate Events? Evidence from SEOs

37 Pages Posted: 9 Apr 2013 Last revised: 26 Sep 2014

See all articles by Douglas J. Cumming

Douglas J. Cumming

Florida Atlantic University; Birmingham Business School; European Corporate Governance Institute (ECGI)

Lutz Johanning

WHU - Otto Beisheim School of Management

Umut Ordu

WHU - Otto Beisheim School of Management

Denis Schweizer

Concordia University

Date Written: April 9, 2013

Abstract

This paper examines the relationship between stock and option markets around SEO events. We compare option-implied volatility and realized volatility to show that option markets do not fully predict risk dynamics following equity issues. Moreover, we show that straddle strategies that explore the difference between option-implied and realized volatility following SEO events can lead to significant risk-adjusted (by common risk factors) positive returns. We also find that risk-adjusted returns can be partially explained by uncertainty (approximated for by option market liquidity). We interpret this as compensation for writing options during times of high uncertainty around the SEO event, where long options are more valuable.

Keywords: Option-implied information, seasoned equity offering, straddle, volatility trading strategy

JEL Classification: C21, G14, G32

Suggested Citation

Cumming, Douglas J. and Johanning, Lutz and Ordu, Umut and Schweizer, Denis, Do Markets Anticipate Changes in Risk after Major Corporate Events? Evidence from SEOs (April 9, 2013). Paris December 2014 Finance Meeting EUROFIDAI - AFFI Paper, Available at SSRN: https://ssrn.com/abstract=2247340 or http://dx.doi.org/10.2139/ssrn.2247340

Douglas J. Cumming

Florida Atlantic University ( email )

777 Glades Rd
Boca Raton, FL 33431
United States

HOME PAGE: http://sites.google.com/view/douglascumming/bio?authuser=0

Birmingham Business School ( email )

Edgbaston Park Road
Birmingham, B15 2TY
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://https://ecgi.global/users/douglas-cumming

Lutz Johanning

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany
+49 261 6509 720 (Phone)

Umut Ordu

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

Denis Schweizer (Contact Author)

Concordia University ( email )

1455 de Maisonneuve Blvd. W.
Montreal, Quebec H3G 1M8
Canada
+1 (514) 848-2424 ext. 2926 (Phone)
+1 (514) 848-4500 (Fax)

HOME PAGE: http://www.concordia.ca/jmsb/faculty/denis-schweizer.html

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