Investors' and Central Bank's Uncertainty Embedded in Index Options
Shocks to equity options' ATM implied volatility (ATMIV) are followed by persistently lower short-term rates. Shocks to the ratio of OTM puts' over OTM calls' implied volatilities (P/C) are followed by persistently higher rates. The stock's and Treasury-bond's ATMIV indices, which measure market and policy uncertainty, are counter-cyclical while the P/C index, which measures downside risk, is pro-cyclical. An equilibrium model where investors and the central bank learn about composite regimes on economic and policy variables explains these options' dynamics, linking them to a learning-based, forward-looking Taylor rule. The model produces several predictions on the relation between options, monetary policy variables, and beliefs that find support in the data.
|Date of creation:||Feb 2011|
|Date of revision:|
|Publication status:||published as Investors' and Central Bank's Uncertainty Embedded in Index Options Alexander David University of Calgary Pietro Veronesi Rev. Financ. Stud. (2014) doi: 10.1093/rfs/hhu024|
|Note:||AP EFG ME|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:16764. See general information about how to correct material in RePEc.
If references are entirely missing, you can add them using this form.