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QBUS6860

Visual Data Analytics

Weekly Assignment 9

Dr Demetris Christodoulou

Discipline of Accounting

MEAFA Research Group

http://sydney.edu.au/business/research/meafa

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Weekly Assignment 9

o The option market for equity investment revises its volatility following

the disclosure of corporate earnings

o Option volatility is a measure for the degree of investor uncertainty

o When companies publish their corporate earnings, the earnings can

be surprising in terms of whether they meet, fail to meet, or exceed

financial analysts’ expectations. This is known as the ‘earnings

surprise’ and is an important form of news to the markets for revising

its prices and volatility

o The option market will revise the volatility in accordance to whether

the earnings surprise is positive (i.e. good news) or negative (i.e. bad

news), but also in accordance to how large or small is the earnings

surprise. We consider zero surprise as positive news.

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Weekly Assignment 9

o So two defining factors for the revision of volatility following the

news announcements is the sign of the earnings surprise and the size

of the earnings surprise

o A third important factor that determines the revision of volatility is

the level of prior volatility. Remember that volatility is a measure of

uncertainty. If the market already felt certain about the state of the

company’s profitability (i.e. low prior volatility) then it might be

shocked more from a large earnings surprise, by comparison to when

the market already feels quite uncertain (i.e. higher prior volatility)

so it will not be surprised as much

o Finally, if the shock is considerable at the time of news release, then

the revision in uncertainty may take time to complete and there

might be a drift past the earnings release date. This is important

information as it tells us about the state of uncertainty of the option

market

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Weekly Assignment 9

o The Graph Objective is “The option market reaction to earnings

release”. The graph objective must analyse the following three effects:

(1) The effect of type of news on volatility: positive or zero earnings

surprise vs. negative earnings surprise;

(2) The effect of magnitude of news: here you need some statistical

definition of magnitude for earnings surprise;

(3) The effect of prior uncertainty: you can think of prior-event

uncertainty as the volatility observed during18-20 days prior the

earnings announcements

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Weekly Assignment 9

o The traditional graphing approach to visualizing the Graph

Objective and the three effects is through a collection of timeline

plots, as shown below, where Q1, Q2, Q3, Q4 indicate quartiles of

earnings surprise (i.e. a definition of news magnitude)

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Weekly Assignment 9

o The traditional timeline approach has several decoding problems:

(1) Although it is easy to decode the direction of the shock effect at

the event date t=0, shown as a sharp decrease in volatility, it is

very hard to compare the relative shock effect across the many

levels of earnings surprise, i.e. we cannot see the relative decline

(2) It is difficult to compare the relative shock effect across bad news

and good news

(3) Although in the good news graph it is easier to see that the level of

the post-event volatility 20 days before is lower than the level of

the pre-event volatility 20 days after, it is difficult to say what is

happening in bad news

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Weekly Assignment 9

o Notice how the traditional timeline approach applies a Data

Reduction approach

o The original dataset, option_volatility.csv, contains 6,191,574

observations (151,014 events × 41 days of volatility each over t=-

20,-19,…,0,…,19,20)

o The traditional approach reduces the data to just 328 data points:

2 graphs × 4 timelines per graph × 41 medians of volatility for

each day t for each timeline.

o Then, the traditional approach connects the median volatilities for

each day per quartile of volatility for good news and for bad news

o It is up to you to follow a Data Reduction approach or not. If you

choose a Data Reduction approach, then you are free to reduce the

dataset to whichever degree and to apply whichever statistical

summary you deem necessary

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Weekly Assignment 9

o As a first step, you are required to reproduce the traditional

approach using the Stata to Tableu video that is available on

Canvas on “Data reduction to statistical summary”

o Then you must report one graph for solving the graph objective and

addressing the limitations of the traditional approach

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Weekly Assignment 9

o All VDA work must be done with Tableau. Any data management

can be done with other software but you must submit your managed

data with the packaged .twbx file. You must also submit your

managed dataset in .csv form.

o You are required to submit a Word file report documenting your

data protocol, data transformations and any data reduction steps,

so that one that reads the report would be be able reproduce the

analysis. This report must be detailed and clear.

o You must also report your key findings with respect to the Graph

Objective.