Option Prices and Disclosure: Theory and Measurement

Option Prices and Disclosure: Theory and Measurement

October 25,2018Working Paper No. 3683

In this paper, I develop an option-pricing model that formally incorporates a disclosure event. Using the model, I first theoretically examine how two properties of the disclosure – its overall informativeness and its informativeness given good relative to bad news – influence the impact that it has on option prices around its release. I then show that, by jointly examining the prices of options with different strikes, a researcher can measure the properties of a single disclosure event, an impossible task using equity prices alone. Finally, I develop and analyze methods of performing this measurement task.

Keywords
option prices, disclosure, earnings announcements