Scheduled domestic and US macroeconomic news and stock valuation in Europe

This paper investigates whether investors on European stock markets regard news announcements about domestic and US macroeconomic variables as an important source of information when valuing stocks. To assess the importance of scheduled domestic and US macroeconomic news announcements, implied volatilities are analyzed on the German and Finnish stock markets. The results show that the US employment report and the Federal Open Market Committee (FOMC) meeting days have a significant impact on implied volatility on both European markets. The domestic news announcements have no effect on implied volatility on either of the markets. The results indicate that the US macroeconomic news announcements are valuable sources of information on European stock markets while domestic news releases seem to be unimportant.     

Volatility spillovers and the effect of news announcements

We examine the effect of US and European news announcements on the spillover of volatility across US and European stock markets. Using synchronously observed international implied volatility indices at a daily frequency, we find significant spillovers of implied volatility between US and European markets as well as within European markets. We observe a stark contrast in the effect of scheduled versus unscheduled news releases. Scheduled (unscheduled) news releases resolve (create) information uncertainty, leading to a decrease (increase) in implied volatility. Nevertheless, news announcements do not fully explain the volatility spillovers, although they do affect the magnitude of volatility spillovers. Our results are robust to extreme market events such as the recent financial crisis and provide evidence of volatility contagion across markets.     

The Determinants of Implied Volatility: A Test Using LIFFE Option Prices

This paper presents and tests a model of the volatility of individual companies' stocks, using implied volatilities derived from option prices. The data comes from traded options quoted on the London International Financial Futures Exchange. The model relates equity volatilities to corporate earnings announcements, interest-rate volatility and to four determining variables representing leverage, the degree of fixed-rate debt, asset duration and cash flow inflation indexation. The model predicts that equity volatility is positively related to duration and leverage and negatively related to the degree of inflation indexation and the proportion of fixed-rate debt in the capital structure. Empirical results suggest that duration, the proportion of fixed-rate debt, and leverage are significantly related to implied volatility. Regressions using all four determining variables explain approximately 30% of the cross-sectional variation in volatility. Time series tests confirm an expected drop in volatility shortly after the earnings announcement and in most cases a positive relationship between the volatility of the stock and the volatility of interest rates.     

An inverted U‐shaped crude oil price return‐implied volatility relationship

We examined the return–volatility relationship for USO ETF oil price return and CBOE Crude Oil ETF Volatility Index, OVX. The data for the USO and OVX covers the period covering May 11, 2007 to February 28, 2013. Our OLS regression results suggest evidence of regular feedback and leverage effects. When we employ linear quantile regression techniques, we find evidence of regular and inverse feedback effects. The inverse feedback effects being noticeable in the upper quantile region of the oil return distribution. There is also support for a regular leverage effect in USO prices. We also examined the return–volatility relationship using quantile regression copula methods for measuring the degree of asymmetry in the relationships between the oil price return and implied volatility. The results of the analysis indicate, first, that there exists a negative relationship between contemporaneous oil VIX and USO ETF oil returns. Second, that the relationship between oil returns and implied volatilities depends on the quartile at which the relationship is being investigated. Third, there exists an inverted U-shaped dependency relationship between returns and implied volatilities across quantiles. Fourth, though an inverted U-shape exists, the shape is different from those observed in stock markets.     

New evidence on the implied-realized volatility relation

We consider the relation between the volatility implied in an option's price and the subsequently realized volatility. Earlier studies on stock index options have found biases and inefficiencies in implied volatility as a forecast of future volatility. More recently, Christensen and Prabhala find that implied volatility in at-the-money one-month OEX call options on the S&P 100 index in fact is an unbiased and efficient forecast of ex-post realized index volatility after the 1987 stock market crash. In this paper, the robustness of the unbiasedness and efficiency result is extended to a more recent period covering April 1993 to February 1997. As a new contribution, implied volatility is constructed as a trade weighted average of implied volatilities from both in-the-money and out-of-the-money options and both puts and calls. We run a horse race between implied call, implied put, and historical return volatility. Several robustness checks, including a new simultaneous equation approach, underscore our conclusion, that implied volatility is an efficient forecast of realized return volatility.     

Simultaneous monetary policy announcements and international stock markets response: An intraday analysis

This paper investigates the return and volatility response of major European and US equity indices to monetary policy surprises by utilizing extensive intraday data on 5-min price quotes along with a comprehensive dataset on monetary policy decisions and macroeconomic news announcements. The results indicate that the monetary policy decisions generally exert immediate and significant influence on stock index returns and volatilities in both European and the US markets. The findings also show that press conferences held by the European Central Bank (ECB) that follow monetary policy decisions on the same day have a clear impact on European index return volatilities. This implies that they convey additional important information to market participants. Overall, our analysis suggests that the use of high frequency data is critical to separate the effect of monetary policy actions from those of macroeconomic news announcements on stock index returns and volatilities.     

Persistence of announcement effects on the intraday volatility of stock returns: Evidence from individual data

We analyze the persistence effects in the empirical relationship between announcement releases and return volatilities of four major companies of the French stock market using high frequency data over the period 1995–1999. Besides its institutional stability, this sample period avoids the econometric difficulties inherent to simultaneous news arrivals. Our approach contributes to the relevant literature in that we focus on individual stock volatilities rather than indices, we distinguish firm‐specific and macroeconomic announcements, and we endogenize both the durations of announcement effects and the response patterns of equity prices. We find that our individual volatilities are affected by a systematic market effect, calendar effects, announcements related to the firms’ macroeconomic environment and announcements related to the firms’ and their competitors’ strategic dealings and commercial outcomes. We find evidence that all volatility responses are gradual with persistence horizons ranging from one to three hours, revealing a significant degree of inefficiency of the French stock market over the period. This inefficiency can be viewed as a breeding ground for the implementation of more performant informational and trading systems that allowed markets to move towards more efficiency.     

Earnings forecasts and idiosyncratic volatilities

We test the theoretical relation between idiosyncratic return volatilities and the volatilities of cash-flow news based on the expected returns on equity (ROE) for CRSP stocks over the period 1977–2008. Consistent with economic intuition, we find that using analyst forecasts of earnings is superior to using realized earnings to proxy for market expectations about future cash flow news. Our findings are consistent with a market where stock return volatilities are positively and asymmetrically related to changes in the volatilities of expectations for a fundamental driver of cash flow news (ROE). Our findings are robust after correcting for forecast biases, various fundamental variables, newly-listed and mature firms, and periods with and without earnings announcements.     

Cash Flow News and Stock Price Dynamics

We develop a new approach to modeling dynamics in cash flows extracted from daily firm-level dividend announcements. We decompose daily cash flow news into a persistent component, jumps, and temporary shocks. Empirically, we find that the persistent cash flow component is a highly significant predictor of future growth in dividends and consumption. Using a log-linearized present value model, we show that news about the persistent dividend growth component predicts stock returns consistent with asset pricing constraints implied by this model. News about the daily dividend growth process also helps explain concurrent return volatility and the probability of jumps in stock returns.     

Common asset pricing factors in volatilities and returns in futures markets

Factor-based asset pricing models have been used to explain the common predictable variation in excess asset returns. This paper combines means with volatilities of returns in several futures markets to explain their common predictable variation. Using a latent variables methodology, tests do not reject a single factor model with a common time-varying factor loading. The single common factor accounts for up to 53% of the predictable variation in the volatilities and up to 14% of the predictable variation in the means. S&P500 futures volatility predicted by the factor model is highly correlated with volatility implied in S&P500 futures options. But both the factor and implied volatilities are significant in predicting future volatility. In derivatives pricing, both implied volatility from options and factors extracted from asset pricing models should be employed.     

Volatility linkages of the equity,bond and money markets: an implied volatility approach

This study proposes an alternative approach for examining volatility linkages between Standard & Poor's 500, Eurodollar futures and 30 year Treasury Bond futures markets using implied volatility from the three markets. Simple correlation analysis between implied volatilities in the three markets is used to assess market correlations. Spurious correlation effects are considered and controlled for. I find that correlations between implied volatilities in the equity, money and bond markets are positive, strong and robust. Furthermore, I replicate the approach of Fleming, Kirby and Ostdiek (1998) to check the substitutability of the implied volatility approach and find that the results are nearly identical; I conclude that my approach is simple, robust and preferable in practice. I also argue that the results from this paper provide supportive evidence on the information content of implied volatilities in the equity, bond and money markets.     

Using implied volatility on options to measure the relation between asset returns and variability

Prior research has documented that volatility in financial asset markets is most directly related to trading rather than calendar days, and that there is an inverse asymmetric relation between volatility and returns in both stocks and long-term bonds. We examine these relations in 37 futures options markets representing a wide variety of asset types. Using futures prices and implied volatilities from this extensive array of markets, we confirm that in all of them, save one, market volatility is more directly related to trading days. However, the nature of the association between implied volatility and underlying asset returns varies greatly across asset categories and across exchanges. Thus, we show that findings from equity markets apparently are not generalizable to other asset classes.     

Global equity market leadership positions through implied volatility measures

Using unique minute-by-minute data on six major country implied volatility series, we examine the spillovers and the leadership positions of the global stock exchanges through measuring and assigning the contributions of innovations among their implied volatilities. The entire analyses are performed on synchronized transactions. A hybrid leadership methodology that is computationally efficient is employed. In nearly all cases, the findings indicate a clear relative leadership position for one or more exchanges. These, in turn, provide important insights into the operations of the markets and convey the dynamic process among them. We also address the transmission mechanism and volatility efficiency.     

Implied Volatility in Options Markets and Conditional Heteroscedasticity in Stock Markets

This study examines whether or not the volatility of stock index returns forecasted by a GARCH-M specification is consistent with the implied volatility observed in options markets. Recent data for the New York Stock Exchange Composite Index and Standard & Poor's 500 Index and their options are employed. The patterns of the term structure of implied volatility are compared with those of volatility estimates obtained from the GARCH process. The results indicate that the GARCH process appears to partially explain the variation of implied volatilities and the term structure of implied volatilities.     

Central bank intervention and the volatility of foreign exchange rates: evidence from the options market

This paper tests the effects of central bank intervention on the ex ante volatility of $/DM and $/yen exchange rates between 1985 and 1991. In contrast to previous research which employed GARCH estimates of conditional volatility, we estimate ex ante volatility using the implied volatilities of currency option prices. We also control for the effects of other macroeconomic announcements. We find little support for the hypothesis that central bank intervention decreases expected exchange rate volatility. Instead, central bank intervention is generally associated with a positive change in ex ante exchange rate volatility, or with no change.     

S&P 500 implied volatility and monetary policy announcements

While many studies have investigated the link between macroeconomic events and equity market volatility, few have considered the impact on option implied volatilities. Given the recent focus on trading in implied volatility, in the context of the S&P 500 VIX index, this paper examines how the VIX index behaves around US monetary policy announcements. It is revealed that the VIX index falls significantly on the day of Federal Open Market Committee meetings.     

From implied to spot volatilities

This paper is concerned with the relation between spot and implied volatilities. The main result is the derivation of a new equation which gives the dynamics of the spot volatility in terms of the shape and the dynamics of the implied volatility surface. This equation is a consequence of no-arbitrage constraints on the implied volatility surface right before expiry. We first observe that the spot volatility can be recovered from the limit, as the expiry tends to zero, of at-the-money implied volatilities. Then, we derive the semimartingale decomposition of implied volatilities at any expiry and strike from the no-arbitrage condition. Finally the spot volatility dynamics is found by performing an asymptotic analysis of these dynamics as the expiry tends to zero. As a consequence of this equation, we give general formulas to compute the shape of the implied volatility surface around the at-the-money strike and for short expiries in general spot volatility models.     

Do Global Risk Perceptions Play a Role in Emerging Market Equity Return Volatilities?

This paper investigates whether global risk perceptions lead emerging market return volatilities. In so doing, we analyzed the period of interest in three parts to determine the effects of the changes in global risk perceptions on the volatility of emerging markets. We uncovered volatility spillover from risk perceptions to the MXEF returns before the crisis. Our results show that all the effects on emerging market volatilities are severed in 2008, during which MXEF follows a downward trend. However, we observe that volatility transmission emerges during the recovery period of MXEF again. Hence, risk perceptions should be considered while analyzing emerging markets.     

The bias in Black-Scholes/Black implied volatility: An analysis of equity and energy markets

In this paper we examine the extent of the bias between Black and Scholes (1973)/Black (1976) implied volatility and realized term volatility in the equity and energy markets. Explicitly modeling a market price of volatility risk, we extend previous work by demonstrating that Black-Scholes is an upward-biased predictor of future realized volatility in S&P 500/S&P 100 stock-market indices. Turning to the Black options-on-futures formula, we apply our methodology to options on energy contracts, a market in which crises are characterized by a positive correlation between price-returns and volatilities: After controlling for both term-structure and seasonality effects, our theoretical and empirical findings suggest a similar upward bias in the volatility implied in energy options contracts. We show the bias in both Black-Scholes/Black implied volatilities to be related to a negative market price of volatility risk. JEL Classification G12 · G13     

Return and volatility co-movement in commodity futures markets: the effects of liquidity risk

Commodity markets are a widely researched topic in the field of finance. In this paper, we investigate the co-movement of return and volatility measures in different commodity futures markets and how these measures are affected by liquidity risk. First, we find that commodity returns display co-movement and that liquidity risk plays a key role in shaping asset return patterns. Moreover, we show that the volatilities of commodity returns co-move, and we demonstrate the role of liquidity risk in this joint pattern. We also find that the commodity markets we investigated share a common volatility factor that determines their joint volatility co-movement. Because liquidity risk affects both commodity returns and volatility shocks, it might be interpreted as the common causal factor driving both measures simultaneously. Therefore, we affirm the view that liquidity shocks are firmly related to two residual risks originating from both market return and market volatility. Finally, we also show that liquidity spillovers can significantly drive cross-sectional correlation dynamics.