By Sam Lim

This paper aims to explore how “earnings surprise”—the difference between earnings
estimates and the actual announced earnings—affects a stock’s volatility and returns using
high frequency data. The results show that earnings surprise is significantly correlated with volatility and overnight returns. Furthermore, an earnings surprise is significantly correlated with an increase in volatility in the trading period immediately following the earnings announcement, but there is no bias indicating which directions prices will go. Even with no “surprise”, the announcement tends to be followed by this increase in volatility. The findings suggest the importance of earnings on equity price valuation.

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Advisor: George Tauchen, Tim Bollerslev