Working Paper: NBER ID: w28306
Authors: Jonathan H. Wright
Abstract: This paper considers new options on Treasury and stock futures than expire each Wednesday and Friday. I examine the volatilities implied by these options as of the night before expiration, and compare the volatilies just before FOMC days and employment report days with the volatilities on other Tuesdays or Thursdays, respectively. This can be used to measure the risk neutral uncertainty associated with FOMC announcements and employment reports. I can also compare the average physical and risk neutral uncertainty: the difference between them is the average variance risk premium. Average variance risk premia are large and significantly positive, especially for FOMC days. Lastly, I construct options-implied densities on the eve of FOMC and employment report days.
Keywords: Options; Volatility; FOMC; Employment Reports; Risk Neutral Uncertainty
JEL Codes: C22; E43; E52; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Higher uncertainty (D89) | Larger variance risk premium (G19) |
| Implied volatilities associated with employment reports and FOMC meetings (E39) | Higher implied volatilities than non-event days (G14) |
| Variance risk premium is significantly positive (D81) | Investors require additional compensation for uncertainty (G19) |