Working Paper: NBER ID: w12270
Authors: Alessandro Beber; Michael W. Brandt
Abstract: We establish an empirical link between the ex-ante uncertainty about macroeconomic fundamentals and the ex-post resolution of this uncertainty in financial markets. We measure macroeconomic uncertainty using prices of economic derivatives and relate this measure to changes in implied volatilities of stock and bond options when the economic data is released. We also examine the relationship between our measure of macroeconomic uncertainty and trading activity in stock and bond option markets before and after the announcements. Higher macroeconomic uncertainty is associated with greater reduction in implied volatilities. Higher macroeconomic uncertainty is also associated with increased volume in option markets after the release, consistent with market participants waiting to trade until economic uncertainty is resolved, and with decreased open interest in option markets after the release, consistent with market participants using financial options to hedge macroeconomic uncertainty. The empirical relationships are strongest for long-term bonds and weakest for non-cyclical stocks.
Keywords: No keywords provided
JEL Codes: G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher ex-ante uncertainty about macroeconomic fundamentals (D84) | greater reduction in the implied volatilities of stock and bond options (G13) |
| higher macroeconomic uncertainty (D89) | increased trading volume in option markets after the release of economic data (G14) |
| higher macroeconomic uncertainty (D89) | reduction of open interest (G13) |
| higher macroeconomic uncertainty (D89) | greater reductions in implied volatilities (G13) |
| macroeconomic uncertainty (D89) | trading activity in stock and bond option markets before and after announcements (G14) |