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Resolving Macroeconomic Uncertainty in Stock and Bond Markets

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  • Alessandro Beber
  • Michael W. Brandt

Abstract

We establish an empirical link between the ex-ante uncertainty about macroeconomic fundamentals and the ex-post resolution of this uncertainty in financial markets. We measure macroeconomic uncertainty using prices of economic derivatives and relate this measure to changes in implied volatilities of stock and bond options when the economic data is released. We also examine the relationship between our measure of macroeconomic uncertainty and trading activity in stock and bond option markets before and after the announcements. Higher macroeconomic uncertainty is associated with greater reduction in implied volatilities. Higher macroeconomic uncertainty is also associated with increased volume in option markets after the release, consistent with market participants waiting to trade until economic uncertainty is resolved, and with decreased open interest in option markets after the release, consistent with market participants using financial options to hedge macroeconomic uncertainty. The empirical relationships are strongest for long-term bonds and weakest for non-cyclical stocks.

Suggested Citation

  • Alessandro Beber & Michael W. Brandt, 2006. "Resolving Macroeconomic Uncertainty in Stock and Bond Markets," NBER Working Papers 12270, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:12270
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    1. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Clara Vega, 2003. "Real-Time Price Discovery in Stock, Bond and Foreign Exchange Markets," PIER Working Paper Archive 04-028, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 28 Jun 2004.
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    JEL classification:

    • G1 - Financial Economics - - General Financial Markets

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