The role of implied volatility in liquidity provision

This article examines the informational volatility– the permanent component of volatilitythat is driven by information – and its effect on stock liquidity provision. Using option- implied volatilityas a proxy for informational volatility, our results show it has a significant negative influence on liquidity provision prior to earnings announcement even after controlling for trade-related market conditions. We find the effect of informational volatilityonly exists on the bid-side but not the ask-side of the order book. Further analysis suggests that the information contained in implied volatilityconcerns the future uncertainty of the underlying stock.JEL Classification: G12; G14; G30