Essays on equity option behavior surrounding macroeconomic announcements
Date
2017
Authors
Journal Title
Journal ISSN
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Publisher
University of Delaware
Abstract
This dissertation presents two empirical studies on equity option behavior around
scheduled macroeconomic announcements. In the rst essay, I analyze the predic-
tive power of implied volatilities of S&P 500 options for underlying index returns on
macroeconomic news days. I design a measure of uncertainty based on economist fore-
cast dispersion. During high uncertainty announcements, the steepness of the implied
volatility function strongly predicts negative next day returns on the S&P 500, im-
plying that buying pressure on out-of-the-money puts precedes bad economic news.
Firm-level implied volatilities for cyclical and high beta stocks also exhibit this be-
havior, indicating that options traders can predict the impact of announcements on
individual stock returns. My ndings are consistent with the notion that informed
options traders can anticipate and capitalize on the upcoming macroeconomic news. ☐ In the second essay, delta-neutral straddles have high returns when realized
volatility is higher than expected, or when price jumps occur. This makes a straddle
an eective proxy for studying variance and jump risk. In my second essay, I analyze
returns on S&P 500 delta-neutral straddles to obtain the size and sign of the vari-
ance and jump risk premiums on macroeconomic announcement days. Announcement
day returns comprise over 77% of the total negative annualized returns on straddles,
implying a vastly larger premium for insuring against changes in volatility and jumps
around systematically released market news. In particular, on days when the Consumer
Price Index, Non-Farm Payrolls, Industrial Manufacturing, and Industrial Production
are announced, average returns are strongly negative ranging from -1.3% to -2.5%. In
comparison, non-announcement days have average straddle returns of -0.1%, indicating
that insurance for volatility and jumps resulting from random economic news shocks
can essentially be obtained for free. However, straddles earn highly positive returns
during Federal Open Market Committee (FOMC) meetings. This pattern of high re-
turns to straddles is consistent with investor anticipation of sharp decreases in realized
volatility as result of government put protection. High average returns compensate
investors on FOMC days for bearing risks associated with stabilizing interventions.
Description
Keywords
Social sciences, Asset pricing, Equity options, Macroeconomics, Options strategies, Volatility