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

  • Ederington, Louis H.
  • Lee, Jae Ha
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    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.

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    Article provided by Cambridge University Press in its journal Journal of Financial and Quantitative Analysis.

    Volume (Year): 31 (1996)
    Issue (Month): 04 (December)
    Pages: 513-539

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    Handle: RePEc:cup:jfinqa:v:31:y:1996:i:04:p:513-539_02
    Contact details of provider: Postal: Cambridge University Press, UPH, Shaftesbury Road, Cambridge CB2 8BS UK
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