Volatility Forecasting Using Financial Statement Information

ABSTRACT

This paper examines whether financial statement information can predict future realized equity volatility incremental to market-based equity volatility forecasts. I use an analytical framework to identify accounting-based drivers of realized volatility. My main hypothesis is that accounting-based drivers can be used to forecast future realized volatility incremental to either past realized volatility or option-implied volatility. I confirm this empirically and document abnormal returns to an option-based trading strategy that takes a long (short) position in firms with financial statement information indicative of high (low) future realized volatility. These results suggest that accounting-based volatility drivers may serve as useful indicators of variance risk. Finally, I demonstrate that the incorporation of accounting-based fundamental information into forecasting models yields lower forecast errors relative to models based solely on past realized volatility.

Keywords:  volatility, option pricing, fundamental analysis, variance risk

Article Citation:

Suhas A. Sridharan (2015) Volatility Forecasting Using Financial Statement Information. The Accounting Review: September 2015, Vol. 90, No. 5, pp. 2079-2106.