Review of Finance Advance Access originally published online on November 27, 2008
Review of Finance 2009 13(1):1-45; doi:10.1093/rof/rfn025
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Resolving Macroeconomic Uncertainty in Stock and Bond Markets*
1 Amsterdam Business School, University of Amsterdam
2 Fuqua School of Business, Duke University and NBER
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. Higher macroeconomic uncertainty is associated with greater reduction in implied volatilities following the news release. It is also associated with increased volume and decreased open interest in option markets after the release, consistent with market participants using financial options to hedge or speculate on macroeconomic news.
* We thank an anonymous referee, Ken Baron, Andrea Buraschi, Mikhail Chernov, Domenico Cuoco, Darrell Duffie, Wayne Ferson, Michael Fleming, Michael Johannes, Krishna Ramaswamy, Tano Santos, Pascal St-Amour, Suresh Sundaresan, Raman Uppal, Josef Zechner (the editor) and seminar participants at the Adam Smith Asset Pricing conference, 2007 American Finance Association meetings, Bank of Italy, Baruch College, Carnegie Mellon University, Columbia University, the 2006 European Finance Association meetings, the Federal Reserve Bank of New York, the CEPR Summer Symposium in Gerzensee, the Skinance conference, Stanford University, the University of California at Berkeley, the University of California at Los Angeles, the University of Illinois, the University of North Carolina, the University of Lausanne, the University of Pennsylvania, the University of Southern California, the University of Venice, and the University of Wisconsin for comments. We also thank Goldman Sachs and, in particular, Bill Cassano for providing the economic derivatives auction results and for explaining institutional details. George Gatopoulos, Emilio Osambela, and Sergei Sontchik provided able research assistance. This research was partially funded by the Global Capital Markets Center of Duke University and the National Center of Competence in Research managed by the Swiss National Science Foundation.