Kevin Krieger

Implications for Asset Returns in the Implied Volatility Skew

This study examined the impact on future asset returns of information contained in the implied volatility skew. Future returns are linked to the discrepancy between call and put volatilities of at-the-money options and to the left side of the volatility skew, calculated as the difference between out-of-the-money and at-the-money puts. The findings discourage the use of skew-based measures for forecasting equity returns without fully parsing the skew into its most basic portions. We examine the impact on future asset returns of information contained in the implied volatility skew. Future returns are linked to the discrepancy between call and put volatilities of at-the-money options and to the left side of the volatility skew, calculated as the difference between out-of-the-money and at-the-money puts. The predictability of the volatility skew is found in U.S. and international markets, as well as in equities and ETFs. Our findings discourage the use of skew-based measures for forecasting equity returns without fully parsing the skew into its most basic portions.

Option Market Efficiency and Analyst Recommendations

This paper examines the information content in option markets surrounding analyst recommendation changes. The sample includes 6,119 recommendation changes for optionable stocks over the period January 1996 through December 2005. As expected, mean underlying asset returns are positive (negative) on days of recommendation upgrades (downgrades). However, volatility levels and shifts prior to recommendation changes explain a significant portion of underlying asset price responses. Ex-ante price and volatility responses in option markets are linked to increased jump uncertainty risk premia. Our findings suggest information in option markets leads analyst recommendation changes, implying revisions contain less information than previously thought. Copyright (c) 2010 Blackwell Publishing Ltd.

The Unintended Consequences of High Expectations and Pressure on New CEOs

We provide empirical tests of a general version of targeting theory that greater scrutiny could lead to executive abuses. Our results show that new CEOs under higher expectations or pressure are more likely to report meeting analyst forecasts; however, this apparent superior performance dissipates after excluding firms having characteristics synonymous with earnings manipulation. We find evidence that new CEOs under greater pressure are considerably more likely to engage in manipulation while the link between expectations and manipulation is much weaker. The results are strongest for new CEOs whose firms report meeting forecasts and do not “walk down�? earnings estimates.

Inefficient pricing from holdover bias in NFL point spread markets

We identify inefficiency in the National Football League (NFL) gambling market indicative of sticky preferences by bettors. NFL teams that qualified for the playoffs in the prior season are favoured by too large a margin in the opening week of the following season. Bettors view these teams as superior though they win only 51.7% of opening week games against teams that failed to make the playoffs in the prior year. Against the point spread, teams that made the playoffs in the prior year win only 35.6% of opening week games played against teams that failed to make the playoffs in the prior year. Systematic betting based on this trend results in significant profitability over the 2004–2012 seasons with an average return over 22% per game. We posit this can be explained by gamblers’ tendencies to cling to perceptions of teams formed from observation in the prior season. This confirms research in more traditional markets, suggesting investors can be slow to update asset valuations.

Comparing U.S. and European market volatility responses to interest rate policy announcements

We examine the response of U.S. (VIX) and German (VDAX) implied volatility indices to the announcement of interest rate policy decisions by the Federal Open Market Committee (FOMC) and the European Central Bank (ECB). We present new findings that indicate that VDAX declines on FOMC meeting days, a result that holds for nearly all announcement types. VDAX declines on ECB meeting days in which there is a negative rate surprise or no surprise and is unrelated to ECB meeting days otherwise. VIX is unrelated to ECB meeting days. We confirm prior findings that VIX declines on FOMC meetings days regardless of the content of the meeting. Taken collectively, our results indicate a prominent position for the FOMC in determining uncertainty levels both domestically and abroad relative to a conditional domestic relation between uncertainty levels and the ECB.

The Sensitivity of Findings of Expected Bookmaker Profitability

Levitt demonstrates that, contrary to conventional wisdom, sports books may not try to balance the money wagered on the sides of a game but instead exploit preferences of bettors in order to maximize expected profits. Levitt’s findings are based on unique data from a wagering contest of the 2002 National Football League (NFL) season. Reconsideration based on 2004-2010 data from a similar contest yields findings of a dramatically smaller increase in expected profitability from strategic line making. Additionally, the traditional underperformance of favorites in athletic wagering may have somewhat subsided, which would also imply reduced bookmaker profits compared to those Levitt reports.

Preseason bias in the NFL and NBA betting markets

ABSTRACT This study extends research in the sports gaming literature by examining the efficiency of betting markets related to preseason professional sporting events. Using NFL (1995–2014) and NBA (2005–2014) data from preseason games, we examine the pricing efficiency of point spreads in these markets and consider evidence of systematic mispricing. Findings suggest point spreads are too large in these situations, providing a profitable betting opportunity for those willing to systematically wager on underdogs. Similar findings are not seen within the context of NFL or NBA regular seasons. These findings are more pronounced as preseason point spreads become larger. Further stratification by week of the NFL preseason demonstrates that underdogs discontinue their superior performance for the one week (Week 3) in which clubs tend to expel a higher level of effort.

Relevance of Goodwill Impairments to Cash Flow Prediction and Forecasting

This study examines the contribution of goodwill impairment information to the prediction and forecasting of future operating cash flows. Extending the framework of Barth, Cram, and Nelson, we find that explicitly including goodwill impairments incrementally improves 1-year-ahead cash flow prediction and forecasting. Improved cash flow forecasting is present over the entire 2001-2009 study period as well as for each year within the study window. In addition, goodwill impairments retain their significance and predictive power when other non-recurring charges (e.g., restructuring, asset write-downs, and merger and acquisition costs) are added to the model, both individually and aggregately, and when market-related information (i.e., change in market capitalization) is included in the model. While these findings are validated by in-sample prediction techniques, this study is also one of only a few studies to investigate the incremental, out-of-sample predictive power of non-current accruals on reported (as opposed to computed) operating cash flows. Analysts, investors, creditors, and others interested in future cash flows should separately consider goodwill impairment information, when available, to improve the accuracy of cash flow prediction and forecasting.

Early Season NFL Over/Under Bias

Popular wisdom regarding athletics is that offenses are at a relative disadvantage in the early portion of seasons. The authors present evidence that this anecdotal belief holds true over the 2000-2010 National Football League (NFL) seasons. This is reflected in lower offensive yardage, fewer first downs, and fewer points scored. While total points scored are significantly lower in Week 1 of NFL seasons, bookmakers fail to reduce the total lines posted on these games. The authors find a strategy betting under total lines of all Week 1 games over the 2000-2010 NFL seasons yields a statistically significant return of 13.6% per game.

Do senior citizens prefer dividends? Local clienteles vs. firm characteristics

We examine the payout policy of U.S. firms over the period 1980–2008. Prior research indicates that firm characteristics, managerial preferences, and investor clienteles are all important factors in setting payout policy. Counter to the oft-reported positive relation between senior citizens and the use of dividends, we find no such significant relation. Our results indicate that either senior citizens are indifferent between dividends and repurchases, or that if seniors do demand dividends, they have no influence over firm payout policy. The evolution of firm characteristics, including the average firm size, age, and volatility of earnings over time, best explains payout policy.