We find that pre-announcement implied volatility spreads and options trading activity are abnormally elevated and can predict Food and Drug Administration (FDA) announcement date stock returns. The effect is more pronounced in firms with higher levels of information asymmetry and lower-quality corporate governance suggesting that some options traders are informed in advance of the details that affect the stock price impact of the FDA news. We provide the first examination of informed options trading prior to FDA announcements during a 21-year period. Our findings have implications for regulators, investors and relevant firms.

In Information Leakage in Energy Derivatives around News Announcements, in the Summer 2020 issue of The Journal of Derivatives, authors Marc Bohmann and Vinay Patel (both of the University of Technology Sydney) investigate information leakage in commodity option markets, by taking a close look at abnormal changes in implied volatility spreads and skew that precede price-sensitive news releases. The growth of electronic trading platforms has made it easier to trade commodities, leading to an increase in futures and associated option contracts. These options in turn serve as a venue for information leakage. Focusing on crude oil and natural gas futures, the most highly traded markets on the Chicago Mercantile Exchange (CME), the authors examine the implied volatility (IV) spread and skew. They show an increase in crude oil markets’ IV spread within the five days prior to positive and market-significant news releases, and in their IV skew within the days preceding negative news releases. They also find a statistically significant relationship between these abnormal pre-announcement IV measures and abnormal returns on the date of the official announcement. They report similar results in natural gas markets. These findings are relevant to regulators, investors, and firms in these energy markets, for example, in evaluating whether financial markets work properly. TOPIC: Options

We provide the first examination of informed options trading around US Food and Drug Administration announcements between 1996 and 2016. Using implied volatility spreads and options trading volume, we find that informed traders are aware of the timing of the news at least five days in advance, and at least some informed traders have knowledge of the details which affect the price impact of the announcement. Such findings are more prevalent in firms with higher levels of information asymmetry and lower quality corporate governance, suggesting insider trading as a possible source of the abnormal options trading activity. Our findings have implications for regulators, investors, and relevant firms.

The authors examine the behavior of US crude oil and natural gas futures options implied volatility–based measures as proxies for information leakage around news announcements between 2007 and 2017. In the five days preceding news releases, they find abnormal changes in the levels of futures options implied volatility spreads and skew. In addition, they report a statistically significant relationship between abnormal announcement date returns and abnormal changes in pre-announcement implied volatility spreads/skew. Their findings indicate that at least some investors are informed about the details of future crude oil and natural gas news. TOPICS:Options, derivatives Key Findings • The study offers a unique examination of information leakage in crude oil and natural gas futures options prior to commodity-specific news between 2007 to 2017. • We report abnormal changes in implied volatility spreads and skew in the five days prior to news announcements. • Pre-announcement abnormal options trading activity indicates that some traders have knowledge about the details of upcoming energy news.

This dissertation contributes to the existing literature by examining trading behaviour around security-level and market-wide events. The research focuses on equity and futures options and continues by providing insights into the price discovery process of futures and options in commodity markets. The first essay examines informed options trading around a sample of 352 Food and Drug Administration announcements from 166 United States (US)-listed firms between 1996 and 2016. Using implied volatility (IV) spreads and options trading volume as proxies for informed trading, it is found that informed traders are aware of the timing of the upcoming announcement at least five days in advance and at least some informed traders have knowledge of the finer details that affect the price impact of the announcement. These findings have implications for regulators, investors and relevant firms. The second essay analyses the behaviour of United States (US) commodity futures and options IV-based measures as proxies for information leakage around macro-economic and commodity-specific news announcements between 2007 and 2017. In the three days preceding news releases, abnormal changes in the levels of futures options IV spreads and skew were reported. In addition, a statistically significant relationship between announcement date returns and abnormal changes in pre-announcement IV spreads and skew were reported. Universally, the findings indicate that at least some investors are informed about the price impact of the upcoming news announcements in seven commodity markets. The third essay investigates the extent of the importance of commodity futures or options markets in the price discovery process in the six most-actively traded markets: crude oil, natural gas, gold, silver, corn and soybeans. Using new information and leadership techniques, new evidence has reported that, in recent times, both markets make a meaningful contribution to price discovery. However, on average, options lead futures in reflecting new information for most of these commodities. In addition, it was found that increased speculation—rather than hedging activity—in commodity derivatives is a key determinant of price discovery in the options markets. The fourth essay sheds light on high versus low-frequency (LF) liquidity measures in times of information asymmetry. Market microstructure data availability has significantly improved and it is now possible to estimate liquidity measures at the nanosecond level. However, this level of data are not available in all markets and time periods and there is a significant cost and computational burden of high-frequency (HF) data. Goyenko et al. (2009) and Fong et al. (2017) show that various LF liquidity measures can proxy for HF benchmarks and show that the results are robust across countries and time. However, liquidity measures do not always behave in the expected fashion during periods of information asymmetry (Collin-Dufresne & Fos, 2015). Drawing from Ball and Brown (1968), an event study methodology is used to investigate whether the LF measures of liquidity can proxy for HF measures around earnings announcements (i.e., periods of information asymmetry). It was found that the closing-percent-quoted-spread is the best proxy for the percent–cost HF benchmarks. In contrast, using cross-sectional, portfolio and individual time-series correlations, the most consistent LF proxies are the high-low impact and closing-percent-quoted-spread impact. However, the performance of these proxies weakens in the pre- and post-announcement periods around the earnings announcement.

We investigate whether commodity futures or options markets play a more important role in the price discovery process in the six most actively traded markets: crude oil, natural gas, gold, silver, corn, and soybeans. Using new information leadership techniques, we report new evidence and report that both markets make a meaningful contribution to price discovery in recent times; however, on average, options lead futures in reflecting new information for a majority of these commodities. We find that increased speculation, rather than hedging activity, in commodity derivatives is a key determinant of price discovery in the options markets.

This paper represents the intersection of three spheres of influence, highly relevant to the global research community interested in a more reliable understanding of capital market phenomena. First, as a timely context, we celebrate the 50-year legacy of an iconic paper on event studies, Ball and Brown (1968). Second, we add our voice to the growing call for researchers to follow principles of “responsible science”. Third, using the Ball and Brown paper as their inspiration, we report on an experiment in which several teams of researchers follow a registration-based editorial process, which illustrates one fruitful avenue on how more responsible research can be fostered in the future.

Market microstructure data availability has significantly improved over time and it is now possible to estimate liquidity measures at the nanosecond level. However, this level of data is unavailable in all markets and time periods and there is a significant cost and computational burden of high-frequency data. Goyenko et al. (2009) and Fong et al. (2017) show that various low-frequency liquidity measures can proxy for high-frequency benchmarks and show that the results are robust across countries and time. However, liquidity measures do not always behave in the expected fashion during periods of information asymmetry (Collin-Dufresne and Fos, 2015). Drawing from Ball and Brown (1968), we use an event study methodology to investigate whether the low-frequency measures of liquidity can proxy for high-frequency measures around earnings announcements (i.e., periods of information asymmetry). We find that the Closing-Price-Quoted-Spread is the best proxy for the percent-cost high-frequency benchmarks. In contrast, using cross-sectional, portfolio and individual time-series correlations the most consistent low-frequency cost-per-dollar proxies are the High-Low-Impact and Closing-Price-Quoted-Spread-Impact, however, the performance of these proxies weakens in the pre- and post-announcement periods around the earnings announcement.

This paper represents the intersection of three spheres of influence, relevant to the global research community interested in a more reliable understanding of capital market phenomena. First, as a timely context, we celebrate the 50-year legacy of an iconic event study of accounting information and the evolution of stock prices, namely Ball and Brown (1968). Second, we add our voice to the growing call for researchers to follow principles of "responsible science". Third, using the Ball and Brown paper as the inspiration, we report on an experiment in which several teams of researchers follow a registration-based editorial process, which illustrates one fruitful avenue for fostering responsible research into the future.

We examine the behavior of US commodity futures and options implied volatility based measures as proxies for informed trading around macroeconomic and commodity-specific news announcements between 2007 and 2017. In the three days preceding news releases, we report abnormal changes in the levels of futures options implied volatility spreads and skew. In addition, we report a statistically significant relationship between announcement date returns and abnormal changes in pre-announcement implied volatility spreads/skew. Holistically, our findings indicate that at least some investors are informed about the price impact of the upcoming news announcements in seven different commodity markets.