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Volatility smiles and the information content of news

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Author Info

  • Fabio Fornari
  • Antonio Mele

Abstract

The paper investigates whether the impact of selected news - scheduled and un-scheduled - affects only the current conditional variance of financial prices or, by bringing new information to the market, induces also a revision of the implied variance, i.e. the variance expected to prevail over the life to maturity of an option. The latter phenomenon would signal that news is able to change permanently the consensus on the future economic environment. In addition to recent similar ana lyses which employ the at the money implied volatility to this aim, tests are also performed on the implied out of money and in the money volatilities. These are in fact extremely sensitive to lack of information about the future evolution of the price of the underlying asset: hence, their prices - as well as their implied volatilities - must change significantly after the occurrence of important events.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Financial Economics.

Volume (Year): 11 (2001)
Issue (Month): 2 ()
Pages: 179-186

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Handle: RePEc:taf:apfiec:v:11:y:2001:i:2:p:179-186

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Cited by:
  1. Fornari, Fabio & Monticelli, Carlo & Pericoli, Marcello & Tivegna, Massimo, 2002. "The impact of news on the exchange rate of the lira and long-term interest rates," Economic Modelling, Elsevier, vol. 19(4), pages 611-639, August.
  2. Jiang, George J. & Konstantinidi, Eirini & Skiadopoulos, George, 2012. "Volatility spillovers and the effect of news announcements," Journal of Banking & Finance, Elsevier, vol. 36(8), pages 2260-2273.
  3. Nikkinen, Jussi & Omran, Mohammed & Sahlstrom, Petri & Aijo, Janne, 2006. "Global stock market reactions to scheduled U.S. macroeconomic news announcements," Global Finance Journal, Elsevier, vol. 17(1), pages 92-104, September.
  4. Robert F. Engle & Martin Klint Hansen & Asger Lunde, 2012. "And Now, The Rest of the News: Volatility and Firm Specific News Arrival," CREATES Research Papers 2012-56, School of Economics and Management, University of Aarhus.
  5. Äijö, Janne, 2008. "Impact of US and UK macroeconomic news announcements on the return distribution implied by FTSE-100 index options," International Review of Financial Analysis, Elsevier, vol. 17(2), pages 242-258.

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