The effects of Federal funds rate surprises on S&P 500 volatility and volatility risk premium |
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| Authors: | Nikolay Gospodinov Ibrahim Jamali |
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| Institution: | 1. Department of Economics, Concordia University, 1455 De Maisonneuve Blvd. West, Montreal, QC H3G 1M8, Canada;2. Department of Finance, Accounting and Managerial Economics, Olayan School of Business, American University of Beirut, Beirut, Lebanon |
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| Abstract: | In this paper, we examine the effects of expected and surprise components in Federal funds target rate changes on realized and implied volatility. We find that surprise changes in the target rate significantly increase volatility. Consistent with the efficient market hypothesis, our analysis suggests that the expected component of a target rate change as well as the target rate change itself, do not significantly affect volatility. We also show that larger than expected decreases in the Federal funds target rate tend to lower the volatility risk premium. |
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