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Intra–day Behavior of Treasury Sector Index Option Implied Volatilities around Macroeconomic Announcements

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  • Andrea J. Heuson
  • Tie Su

Abstract

If option implied volatility is an unbiased, efficient forecast of future return volatility in the underlying asset, then we should be able to predict its path around macroeconomic announcements from responses in cash markets. Regressions show that volatilities rise the afternoon before announcements that move cash markets, and that post–announcement volatilities return to normal as rapidly as cash prices do. Although implied volatilities are predictable, the Treasury options market is efficient since informed traders do not earn arbitrage profits once we account for trading costs.

Suggested Citation

  • Andrea J. Heuson & Tie Su, 2003. "Intra–day Behavior of Treasury Sector Index Option Implied Volatilities around Macroeconomic Announcements," The Financial Review, Eastern Finance Association, vol. 38(1), pages 161-177, February.
    • Handle: RePEc:bla:finrev:v:38:y:2003:i:1:p:161-177
    DOI: 10.1111/1540-6288.00040
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    References listed on IDEAS

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    Cited by:

    1. Bruce Mizrach & Christopher J. Neely, 2007. "The microstructure of the U.S. treasury market," Working Papers 2007-052, Federal Reserve Bank of St. Louis.
    2. Markellos, Raphael N. & Psychoyios, Dimitris, 2018. "Interest rate volatility and risk management: Evidence from CBOE Treasury options," The Quarterly Review of Economics and Finance, Elsevier, vol. 68(C), pages 190-202.
    3. 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.
    4. 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.

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