Unexpected Risks and Media

Unexpected Risks and Media
This paper examines the relation between information disclosure and the term-structure of unexpected option-implied volatility. First, we use media coverage as a proxy for information disclosure and document that intensely covered firms exhibit future spot option-implied volatilities which are lower than corresponding forward option-implied volatilities over various horizons. On average, options on firms in the highest abnormal media coverage decile exhibit a roughly 0.55% drop in unexpected implied volatility relative to the lowest abnormal intensity decile over the next three weeks. An option strategy designed to capture this spread would have earned approximately 48% annually from 2011-2017. This relation is robust to various controls and econometric specifications and is also present within option-implied volatilities pertaining to de- veloped country currencies. Second, we document that sentiment (i.e., coverage tone) and sentiment dispersion (standard deviation) are also related to future risks, but over longer horizons. These results suggest that media coverage contains information about unexpected future risk.

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By mkt
on 21 Aug 2018