Essays on equity option behavior surrounding macroeconomic announcements
| Author(s) | DeSimone, Garrett T. | |
| Date Accessioned | 2018-03-26T13:32:12Z | |
| Date Available | 2018-03-26T13:32:12Z | |
| Publication Date | 2017 | |
| SWORD Update | 2017-11-10T17:23:31Z | |
| 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. | en_US |
| Advisor | Laux, Paul | |
| Advisor | Beck, Stacie | |
| Degree | Ph.D. | |
| Department | University of Delaware, Department of Economics | |
| DOI | https://doi.org/10.58088/khhv-2914 | |
| Unique Identifier | 1029553293 | |
| URL | http://udspace.udel.edu/handle/19716/23116 | |
| Language | en | |
| Publisher | University of Delaware | en_US |
| URI | https://search.proquest.com/docview/2002373004?accountid=10457 | |
| Keywords | Social sciences | en_US |
| Keywords | Asset pricing | en_US |
| Keywords | Equity options | en_US |
| Keywords | Macroeconomics | en_US |
| Keywords | Options strategies | en_US |
| Keywords | Volatility | en_US |
| Title | Essays on equity option behavior surrounding macroeconomic announcements | en_US |
| Type | Thesis | en_US |