The role of implied volatility in liquidity provision

Daniel Cahill, Kingsley Fong, Marvin Wee, Joey Yang

Research output: Contribution to journalArticle

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.
Original languageEnglish
Number of pages27
JournalAustralian Journal of Management
DOIs
Publication statusPublished - 16 Apr 2019

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