We propose an underrecognized measure to capture changes in firm risk from information technology (IT) announcements: implied volatility (IV) from a firm’s exchange-traded options. An IV is obtained from a priced stock option and represents the option market’s expectation of the firm’s average stock return volatility over the remaining duration of the option. Using the change in IV around IT announcements, we can directly assess changes in IT-induced firm risk. IVs are straightforward to obtain, and are forward-looking based on option market investors’ estimates of future stock return volatility. They do not rely on historical volatility that is confounded with other events. In addition, options have different expiration dates—each with an IV—allowing us to distinguish between short- and long-term risk. We show how a change in IV can be employed to assess changes in short- and long-term firm risk from IT announcements and demonstrate this methodological innovation empirically using a set of IT announcements that have been utilized in previous studies.
Zhang, Dawei (David) and Nault, Barrie R.
"Measuring Risk from IT Initiatives Using Implied Volatility,"
Journal of the Association for Information Systems: Vol. 20
, Article 5.
Available at: https://aisel.aisnet.org/jais/vol20/iss11/5