Hostname: page-component-78c5997874-4rdpn Total loading time: 0 Render date: 2024-11-05T11:51:25.376Z Has data issue: false hasContentIssue false
  • English
  • Français

The Creation and Resolution of Market Uncertainty: The Impact of Information Releases on Implied Volatility

Published online by Cambridge University Press:  09 June 2010

Louis H. Ederington  and
Jae Ha Lee
Louis H. Ederington
Affiliation:
College of Business Administration, University of Oklahoma, Norman, OK 73019.
Jae Ha Lee
Affiliation:
College of Business Administration, University of Oklahoma, Norman, OK 73019.
Get access Rights & Permissions [Opens in a new window]

Abstract

We model and examine the impact of information releases on market uncertainty as measured by the implied standard deviation (ISD) from option markets. Distinguishing between scheduled and unscheduled announcements, we hypothesize that since the timing, although not the content, of scheduled announcements is known a priori, the pre-release ISD will impound the anticipated impact of important releases on price volatility and that the ISD will normally decline post-release as this uncertainty is resolved. Conversely, we hypothesize that the unexpected high volatility caused by major unscheduled releases will cause market participants to adjust upward their estimates of likely volatility over the remaining life of the option resulting in an increase in the ISD. Our evidence supports both hypotheses. The ISDs that we consider are from the T-Bond, Eurodollar, and Deutschemark options markets. We examine scheduled macroeconomic news releases such as the employment report and the PPI. We also find that the observed tendency for the ISD to fall on Fridays and rise on Mondays is due to the weekday pattern of scheduled news releases.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 31 , Issue 4 , December 1996 , pp. 513 - 539
Copyright
Copyright © School of Business Administration, University of Washington 1996

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Bailey, W. “Money Supply Announcements and the Ex-Ante Volatility of Asset Prices.” Journal of Money, Credit and Banking, 20 (1988), 611–620.Google Scholar
Ball, C., and Roma, A.. “Stochastic Volatility Option Pricing.” Journal of Financial and Quantitative Analysis, 29 (1994), 589–607.Google Scholar
Black, F. “The Pricing of Commodity Contracts.” Journal of Financial Economics, 3 (1976), 167–179.Google Scholar
Bollerslev, T.; Chou, R. Y.; and Kroner, K. F.. “ARCH Modeling in Finance: A Review of the Theory and Empirical Evidence.” Journal of Econometrics, 52 (1992), 5–59.Google Scholar
Bonser-Neal, C., and Tanner, G.. “Central Bank Intervention and the Volatility of Foreign Exchange Rates: Evidence from the Options Market.” Working Paper #95–04, Federal Reserve Bank of Kansas City Research (1994).Google Scholar
Brown, K.; Harlow, W.; and Tmic, S.. “The Risk and Return of Common Stock following Major Price Innovations.” Journal of Financial and Quantitative Analysis, 28 (1993), 101–116.CrossRefGoogle Scholar
Butler, J., and Schachter, B.. “Unbiased Estimation of the Black/Scholes Formula.” Journal of Financial Economics. 15 (1986), 341–357.CrossRefGoogle Scholar
Canina, L., and Figlewski, S.. “The Informational Content of Implied Volatility.” Review of Financial Studies, 6 (1993), 659–681.CrossRefGoogle Scholar
Chiras, D., and Manaster, S.. “The Informational Content of Option Prices and a Test of Market Efficiency.” Journal of Financial Economics, 6 (1978), 213–234.CrossRefGoogle Scholar
Choi, S., and Wohar, M. E.. “Implied Volatility in Options Markets and Conditional Heteroskedasticitv in Stock Markets” Financial Review, 27 (1992), 503–530.Google Scholar
Cornell, B. “Using the Option Pricing Model to Measure the Uncertainty Producing Effect of Major Announcements.” Financial Management, 7 (1978), 54–59.Google Scholar
Day, T. E., and Lewis, C. M.. “The Behavior of the Volatility Implicit in the Prices of Stock Index Options.” Journal of Financial Economics. 22 (1988), 103–122.Google Scholar
Day, T. E., and Lewis, C. M.. “Stock Market Volatility and the Information Content of Stock Index Options.” Journal of Econometrics. 52 (1992), 267–287.Google Scholar
Edenngton, L. H., and Lee, J. H.. “How Markets Process Information: News Releases and Volatility.” Journal of Finance. 48 (1993), 1161–1191.Google Scholar
Edenngton, L. H., and Lee, J. H.. “The Short-Run Dynamics of the Price Adjustment to New Information.” Journal of Financial and Quantitative Analysis, 30 (1995), 117–134.Google Scholar
Engle, R. F., and Mustafa, C.. “Implied ARCH Models from Options Prices.” Journal of Econometrics. 52 (1992), 289–311.Google Scholar
Franks, J. R.. and Schwartz, E. S.. “The Stochastic Behavior of Market Variance Implied in the Prices of Index Options.” Economic Journal, 101 (1991), 1460–1475.Google Scholar
French, D. W. “The Weekend Effect on the Distribution of Stock Prices.” Journal of Financial Economics. 13 (1984), 547–559.Google Scholar
French, D. W., and Frasier, D.. “A Note on Interest Rates and the Risk of Bank and Savings and Loan Stock.” Financial Review, 21 (1986), 551–558.Google Scholar
French, D.; Swidler, S.; and Trapani, T.. “Disclosure of Corporate Events: An Examination of the SEC's 8-K Report. Working Paper, Univ. of Texas at Arlington (1994).Google Scholar
Harvey, C. P.. and Whaley, R. E.. “Market Volatility Prediction and the Efficiency of the S&P 100 Index Option Market. Journal of Financial Economics, 31 (1992), 43–74.Google Scholar
Heynen, R.; Kemna, K.; and Vorst, T.. “Analysis of the Term Structure of Implied Volatilities.” Journal of Financial and Quantitative Analysis, 29 (1994), 31–56.Google Scholar
Hull, J., and White, A.. “The Pricing of Options on Assets with Stochastic Volatilities.” Journal of Finance, 42 (1987), 281–300.Google Scholar
Jorion, P. “Predicting Volatility in the Foreign Exchange Market.” Journal of Finance, 50 (1995), 507–528.CrossRefGoogle Scholar
Kim, O.; and Verrecchia, R. E.. “Market Reaction to Anticipated Announcements.” Journal of Financial Economics, 30 (1991), 273–310.CrossRefGoogle Scholar
Lamoureux, C. G., and trapes, W. D. Las. “Forecasting Stock-Return Variance: Toward an Understanding of Stochastic Implied Volatilities.” Review of Financial Studies, 6 (1993), 293–326.Google Scholar
Latanè, H. A., and Rendleman, R. J. Jr, “Standard Deviations of Stock Price Ratios Implied in Options Prices.” Journal of Finance, 31 (1976), 369–381.Google Scholar
Levy, H., and Yoder, J.. “The Behavior of Option Implied Standard Deviations around Merger and Acquisition Announcements.” Financial Review, 28 (1993), 261–272.Google Scholar
Merton, R. “Theory of Rational Option Pricing.” Bell Journal of Economics and Management Science, 4 (1973), 141–183.Google Scholar
Merville, L. J., and Pieptea, D. R.. “Stock-Price Volatility. Mean-Reverting Diffusion, and Noise.” Journal of Financial Economics, 24 (1989), 193–214.Google Scholar
Patell, J. M.. and Wolfson, M. A.. “Anticipated Information Releases Reflected in Call Option Prices." Journal of Accounting and Economics, 1 (1979), 117–140.CrossRefGoogle Scholar
Patell, J. M.. and Wolfson, M. A.. “The Ex Ante and Ex Post Price Effect of Quarterly Earnings Announcements Reflected in Option and Stock Prices.” Journal of Accounting Research, 19 (1981), 434–458.Google Scholar
Xu, X.. and Taylor, S.. “Conditional Volatility and the Informational Efficiency of the PHLX Currency Options Market.” Journal of Banking and Finance, 19 (1995), 803–822.Google Scholar