The impact of macroeconomic announcements on implied volatility

Purpose – The purpose of this paper is to understand that option pricing is the response of option implied volatility (IV) to macroeconomic announcements. Design/methodology/approach – The authors use high-frequency data on ASX SPI 200 index options to examine the response of option IV, as well as higher moments of the underlying return distribution, to macroeconomic announcements. Additionally, the authors identify the response of the moments as a function of moneyness of the options. Findings – The findings suggest that in-the-money and out-of-the money options have difference characteristics in their responses, leading to the conclusion that heterogeneity in investor beliefs and preferences affect option IV through the state price density (SPD) function. Originality/value – The research contributes to the literature that examines whether IV captures the beliefs of market participants about the likelihood of future states together with the preferences of market participants towards these states. In particular, the authors relate changes in option IV to changes in macroeconomic announcements, through the impact of these announcements on the moments of the SPD function.

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The impact of macroeconomic information releases on the smile shape

Review of Behavioral Finance ◽

10.1108/rbf-10-2014-0049 ◽

2016 ◽

Vol 8 (1) ◽

pp. 80-90 ◽

Cited By ~ 1

Author(s):

Hassan Tanha ◽

Michael Dempsey

Keyword(s):

Implied Volatility ◽

Content Type ◽

Macroeconomic Information ◽

Macroeconomic Announcements ◽

Pricing Errors ◽

Black Scholes ◽

Investor Behaviour ◽

Volatility Function ◽

S Model ◽

The Impact

Purpose – The purpose of this paper is to assign fair values to options reduces to the attempt to attribute correct implied volatilities. Here, the authors extend the study by Tanha et al. (2014) to determine the impact of macro economic announcements on the option smile. Design/methodology/approach – First, the authors estimate the implied volatility function in terms of moneyness. The authors next analyse the impact of macroeconomic announcements on the estimated coefficients (b 0, b 1, b 2) by regressing the coefficients on the macroeconomic announcements. Findings – The authors find that in-the-money options are sensitive to such announcements, but that out-of-the money options are not. This is consistent with the interpretation of investor behaviour from prospect theory. Originality/value – The systematic pricing errors that have been documented using the Black-Scholes model have stimulated attempts to improve the model predictions. The approach uses DVF model to improve the B-S model.

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The Impact of Jump Distributions on the Implied Volatility of Variance

SSRN Electronic Journal ◽

10.2139/ssrn.2396482 ◽

2014 ◽

Author(s):

Elisa Nicolato ◽

Camilla Pisani ◽

David Sloth

Keyword(s):

Implied Volatility ◽

The Impact

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The Impact of Net Buying Pressure on Implied Volatility: The Learning Hypothesis versus the Limits of Arbitrage Hypothesis

SSRN Electronic Journal ◽

10.2139/ssrn.686574 ◽

2005 ◽

Author(s):

Hyoung-jin Park ◽

Jangkoo Kang

Keyword(s):

Implied Volatility ◽

Learning Hypothesis ◽

The Impact

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ANALYSIS OF MARKET VOLATILITY VIA A DYNAMICALLY PURIFIED OPTION PRICE PROCESS

Annals of Financial Economics ◽

10.1142/s2010495214500067 ◽

2014 ◽

Vol 09 (03) ◽

pp. 1450006 ◽

Cited By ~ 1

Author(s):

CHUONG LUONG ◽

NIKOLAI DOKUCHAEV

Keyword(s):

Stock Price ◽

Implied Volatility ◽

Financial Time Series ◽

Option Price ◽

Option Prices ◽

Price Process ◽

Volatility Index ◽

Quadratic Interpolation ◽

Dynamic Estimation ◽

The Impact

The paper studies methods of dynamic estimation of volatility for financial time series. We suggest to estimate the volatility as the implied volatility inferred from some artificial "dynamically purified" price process that in theory allows to eliminate the impact of the stock price movements. The complete elimination would be possible if the option prices were available for continuous sets of strike prices and expiration times. In practice, we have to use only finite sets of available prices. We discuss the construction of this process from the available option prices using different methods. In order to overcome the incompleteness of the available option prices, we suggests several interpolation approaches, including the first order Taylor series extrapolation and quadratic interpolation. We examine the potential of the implied volatility derived from this proposed process for forecasting of the future volatility, in comparison with the traditional implied volatility process such as the volatility index VIX.

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