Author: Antti Miettinen

Title of thesis: Implied volatility and derivatives market efficiency on the call options

of a technology company

Date: 8.5.2000             Pages: 79

Department: Industrial Management

Professorship: Mat-2 Applied Mathematics

Supervisor: Professor Ahti Salo

Instructor: Pekka Peiponen, Senior Vice President, HEX Ltd


This thesis studies the implied volatility behavior of Nokia's call options around scheduled earnings announcement days. According to the hypothesis the implied volatility is assumed to increase before the earnings announcement in efficient derivatives market, and to drop sharply after the earnings release. However, only on the announcement day are movements in the price of the underlying stock significantly larger than expected. The hypothesis is tested by examining the changes of volatility around scheduled earnings announcement days. Regression models are used to determine the significance of the results. According to the results, conclusions are made on the efficiency of the derivatives market. The analyzed data includes the quotations of Nokia stock and call options from Helsinki and Stockholm exchanges from years 1995 to 1999.

The results support the efficient market hypothesis. The implied volatility of Nokia's call options increases before the announcement day, reaches a maximum just before the earnings announcement, and moves back to it's long-run level after the announcement. The effect is similar on both Helsinki and Stockholm derivatives markets. The effect in Stockholm seems to be somewhat sharper, but the difference may be less due to a difference in the efficiency of the market than the methology used. The volatilities are calculated on a daily basis, and the distinction of trading hours between the exchanges creates some bias to the results. The results corroborate previous foreign studies to a large extent.

Keywords: implied volatility, market efficiency, option pricing