Mythbusters: The Volatility Edition

While individual stocks see heightened volatility during earnings season, markets are relatively unaffected

Apr 29, 2015 at 8:54 AM
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In my never-ending (futile) quest to improve the volatility education we get on the TeeVee, I bring you this from the other day:

"Typically, you get a lot of volatility in the market as earnings get reported."

That sounds intuitive, right? But, it contains no real basis in fact.

I may mention from time to time that I wrote an options book. OK, if I haven't mentioned it, I had a book published in 2009.

Anyway, I bring this up for self-promotion … I mean, for the purpose of mentioning some numbers I ran way back then. If we really do get a lot of volatility around earnings, it should reflect that in elevated CBOE Volatility Index (VIX) readings during earnings season. The bulk of earnings come out in the back end of January, April, July, and October. So, all other things being equal, we should see increased VIX in the second half of those four months.

Well, as luck would have it, I did a study where I looked at VIX in the front- and back-end of each monthly cycle. In my numbers, "first-half January" is actually late December on the calendar.

So, if we did indeed see "a lot of volatility in the market as earnings get reported," my numbers would show elevated volatility in the first halves of February, May, August, and November.

Did we? Well, here are the rankings by first-half median VIX:

  • December 20.09
  • March 18.62
  • February 18.47
  • September 18.02
  • April 17.79
  • August 17.75
  • November 17.03
  • June 17.03
  • January 16.94
  • May 16.82
  • October 16.66
  • July 16.18

If volatility did indeed pick up much during earnings season, I would have expected those cycles highlighted in bold to sit closer to the top of the list. Yet as of 2009, they ranked 3rd, 6th, 7th, and 10th. That's about as random as possible, and suggests to me there's no actual global volatility spike around earnings.

And perhaps the vol-spike notion isn't even as intuitive as meets the eye. Yes, individual stocks can make big and volatile earnings moves. But, in order to see a global volatility move, we'd need all those earnings moves to go in the same direction. And that's very unlikely. Markets adjust quickly. If we start out with some disappointments, we tend to lower the bar going forward, and then get relief rallies. Or, vice versa. Throw it all together, and the market itself doesn't tend to see unusually large earnings-related moves.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.

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