How Scheduled Events Affect Implied and Realized Volatility

Summary

The document explains why implied volatility and historical realized volatility can move in opposite directions when a scheduled event occurs. Before the event, implied volatility for a fixed expiry can reflect uncertainty from that event as well as other events expected before expiry. Once the event has passed, that source of future uncertainty is removed, which can lower implied volatility even though the underlying has just experienced a substantial move.

Historical volatility responds differently: it measures past price changes over a rolling observation window, so the event’s move can raise the estimate while that move remains in the sample. The answer gives this timing distinction as a conceptual explanation and points to research on firm-specific news and implied volatility for a fuller treatment. It does not provide event-study data, quantify typical changes, or distinguish among event types, expiry choices, and volatility estimation methods; the direction and size of observed changes can therefore depend on those details.

Key ideas

• Implied volatility for a fixed expiry can include uncertainty from scheduled events still ahead.
• After an event occurs, the remaining expected event risk to that expiry may decrease, lowering implied volatility.
• Historical volatility can rise after an event because its price move enters the measurement window.
• The two measures differ in timing: one reflects expected future uncertainty and the other summarizes past returns.

Tags

# Implied vol vs Realised vol on Event Days


# Implied vol vs Realised vol on Event Days












How implied vol varies vis-a-vis realised vol on an event days?

## Answer by Mats Lind (score 4, accepted)

https://quant.stackexchange.com/a/49233

For a very short answer, given that the event is scheduled, the implied vol for a fixed future expiry date decreases, and the historical volality increases at event time. This could seem a bit counterintuitive but the implied vol factors in all scheduled forthoming events up to expiry. As the event has hit the market and its impact is priced into the underlying, there are less events left to expiry and less volatility to expect, so implied vol decreases. Historical vol on the other hand measures the impact from the event as long as the event stays in the historical measurement window, adding to the measure.

edit: Here is a link to a published research paper (Donders and Vorst: The impact of firm specific news on implied volatilities) giving you the longer answer with more details;

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.