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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.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12270.

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Date of creation: Jun 2006
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Publication status: published as Alessandro Beber & Michael W. Brandt, 2008. "Resolving Macroeconomic Uncertainty in Stock and Bond Markets," Review of Finance, Oxford University Press for European Finance Association, vol. 13(1), pages 1-45.
Handle: RePEc:nbr:nberwo:12270

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  1. Zarnowitz, Victor & Lambros, Louis A, 1987. "Consensus and Uncertainty in Economic Prediction," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 95(3), pages 591-621, June.
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  3. 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, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania 04-028, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 28 Jun 2004.
  4. Gürkaynak, Refet S. & Wolfers, Justin, 2006. "Macroeconomic Derivatives: An Initial Analysis of Market-Based Macro Forecasts, Uncertainty and Risk," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5466, C.E.P.R. Discussion Papers.
  5. Andersen, Torben G. & Bollerslev, Tim & Diebold, Francis X. & Vega, Clara, 2002. "Micro Effects of Macro Announcements: Real-Time Price Discovery in Foreign Exchange," Working Papers, Duke University, Department of Economics 02-16, Duke University, Department of Economics.
  6. Andrea Buraschi & Alexei Jiltsov, 2006. "Model Uncertainty and Option Markets with Heterogeneous Beliefs," Journal of Finance, American Finance Association, American Finance Association, vol. 61(6), pages 2841-2897, December.
  7. Alessandro Beber & Michael W. Brandt, 2003. "The Effect of Macroeconomic News on Beliefs and Preferences: Evidence from the Options Market," NBER Working Papers, National Bureau of Economic Research, Inc 9914, National Bureau of Economic Research, Inc.
  8. Michael J. Fleming & Eli M Remolona, 1999. "The term structure of announcement effects," BIS Working Papers, Bank for International Settlements 71, Bank for International Settlements.
  9. Mark J. Flannery & Aris A. Protopapadakis, 2002. "Macroeconomic Factors Do Influence Aggregate Stock Returns," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 15(3), pages 751-782.
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Cited by:
  1. Choy, Siu Kai & Wei, Jason, 2012. "Option trading: Information or differences of opinion?," Journal of Banking & Finance, Elsevier, Elsevier, vol. 36(8), pages 2299-2322.
  2. Fornari, Fabio, 2008. "Assessing the compensation for volatility risk implicit in interest rate derivatives," Working Paper Series, European Central Bank 0859, European Central Bank.
  3. Belén Nieto & Gonzalo Rubio, 2007. "Measuring time-varying economic fears with consumption-based stochastic discount factors," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 1029, Department of Economics and Business, Universitat Pompeu Fabra, revised Sep 2007.
  4. Asani Sarkar & Robert A. Schwartz, 2007. "Market sidedness: insights into motives for trade initiation," Staff Reports, Federal Reserve Bank of New York 292, Federal Reserve Bank of New York.
  5. Alejandro Bernales & Massimo Guidolin, 2012. "Can We Forecast the Implied Volatility Surface Dynamics of Equity Options? Predictability and Economic Value Tests," Working Papers, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University 456, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  6. Bekaert, Geert & Hoerova, Marie & Scheicher, Martin, 2009. "What do asset prices have to say about risk appetite and uncertainty?," Working Paper Series, European Central Bank 1037, European Central Bank.
  7. Lubos Pastor & Pietro Veronesi, 2009. "Learning in Financial Markets," Annual Review of Financial Economics, Annual Reviews, Annual Reviews, vol. 1(1), pages 361-381, November.
  8. Bakshi, Gurdip & Carr, Peter & Wu, Liuren, 2008. "Stochastic risk premiums, stochastic skewness in currency options, and stochastic discount factors in international economies," Journal of Financial Economics, Elsevier, Elsevier, vol. 87(1), pages 132-156, January.
  9. George J. Jiang & Ingrid Lo & Adrien Verdelhan, 2008. "Information Shocks, Jumps, and Price Discovery -- Evidence from the U.S. Treasury Market," Working Papers, Bank of Canada 08-22, Bank of Canada.
  10. Patton, Andrew J & Timmermann, Allan G, 2007. "Learning in Real Time: Theory and Empirical Evidence from the Term Structure of Survey Forecasts," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6526, C.E.P.R. Discussion Papers.
  11. Jiang, George J. & Konstantinidi, Eirini & Skiadopoulos, George, 2012. "Volatility spillovers and the effect of news announcements," Journal of Banking & Finance, Elsevier, Elsevier, vol. 36(8), pages 2260-2273.
  12. Nieto, Belén & Rubio, Gonzalo, 2011. "The volatility of consumption-based stochastic discount factors and economic cycles," Journal of Banking & Finance, Elsevier, Elsevier, vol. 35(9), pages 2197-2216, September.
  13. Blaise Gadanecz & Richhild Moessner & Christian Upper, 2007. "Economic derivatives," BIS Quarterly Review, Bank for International Settlements, Bank for International Settlements, March.

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