Top

Financial Markets and Portfolio Management

Published in:

01-09-2012

VIX changes and derivative returns on FOMC meeting days

Authors: Kevin Krieger, Nathan Mauck, Denghui Chen

Published in: Financial Markets and Portfolio Management | Issue 3/2012

Activate our intelligent search to find suitable subject content or patents.

search-config

AI-assisted search

Off

Abstract

We examine the link between scheduled Federal Open Market Committee (FOMC) meetings and the VIX measure. Our results indicate that VIX declines significantly on scheduled meeting dates. Unlike prior studies suggesting that the drop in VIX is mechanical, we attribute the decline to the resolution of uncertainty regarding future interest rates provided by the meetings. We examine returns to investable positions on VIX. Though a decline in the VIX level commonly occurs on FOMC meeting dates, we find that significant returns may still be garnered from taking short-VIX positions in derivative markets, even after accounting for the bid-ask spread.

previous article Any regulation of risk increases risk

next article Financial frictions and real implications of macroprudential policies

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

A similar finding (Hess et al. 2008) links macroeconomic state and commodity indices in the United States.

Our focus is on scheduled FOMC meetings as we seek to demonstrate predictable effects. Fed actions may be interpreted differently by markets in the case of unscheduled meetings (see, e.g, Sakar 2009).

An asymmetric effect in which negative surprises are met with a larger reaction than positive surprises has also been documented by Lobo et al. (2003) among others.

Bekaert et al. (2010) decompose VIX into uncertainty and risk-aversion components and conclude that lax FOMC meeting policy is related to risk aversion in the medium term and not uncertainty. Our paper differs from theirs in that we focus on the short-term reaction of VIX to scheduled meeting announcements.

See, for example, Lobo (2002), Bomfim (2003), Andersson (2010), and Chuliá et al. (2010).

While open interest in VIX options has increased since the initiation of the instruments in 2006, the dollar value of VIX option positions is still relatively limited (typically tens of millions of dollars of contracts on FOMC dates). We suspect that further prevalence of VIX options may close trading inefficiencies, but the effect has remained rather consistent to this time.

http://www.cboe.com/micro/vix/historical.aspx.

http://www.federalreserve.gov/monetarypolicy/fomccalendars.html.

We thank an anonymous referee for this suggestion.

We thank an anonymous referee for this suggestion and for noting the importance of the market reaction.

Given the small sample sizes, we no longer test for the statistical significance when considering these classifications.

Ahn, S., Melvin, M.: Exchange rates and FOMC days. J. Money Credit Banking 39, 1245–1266 (2007)CrossRef

Allen, F., Karjalainen, R.: Using genetic algorithms to find technical trading rules. J. Financial Econ. 51, 245–271 (1999)CrossRef

Andersson, M.: Using intraday data to gauge financial market responses to fed and ECB monetary policy decisions. Int. J. Cent. Banking 6, 117–146 (2010)

Bekaert, G., Hoerova, M., Lo Duca, M.: Risk, uncertainty and monetary policy. Working paper, Columbia, ECB (2010)

Bernanke, B., Kuttner, K.: What explains the stock market’s reaction to Federal Reserve Policy. J. Finance 60, 221–1257 (2005)CrossRef

Bomfim, A.: Pre-announcement effects, news effects, and volatility: monetary policy and the stock market. J. Banking Finance 27, 133–151 (2003)CrossRef

Chen, E., Clements, A.: S&P 500 implied volatility and monetary policy announcements. Finance Res. Lett. 4, 27–232 (2007)CrossRef

Chuliá, H., Martens, M., Van Dijk, D.: Asymmetric effects of federal funds target rate changes on S&P 100 stock returns volatilities and correlations. J. Banking Finance 34, 834–839 (2010)CrossRef

Dennis, P., Mayhew, S., Stivers, C.: Stock returns, implied volatility innovations, and the asymmetric volatility phenomenon. J. Financial Quant. Anal. 41, 381–406 (2006)CrossRef

Ehrmann, M., Fratzscher, M.: Purdah: on the rationale for central bank silence around policy meetings. J. Money Credit Banking 41, 517–528 (2009)CrossRef

Han, B.: Investor sentiment and option prices. Rev. Financial Stud. 21, 387–414 (2008)CrossRef

Hess, D., Huang, H., Nielssen, A.: How do commodity futures respond to macroeconomic news? Financial Mark. Portfolio Manag. 22, 127–146 (2008)CrossRef

Kurov, A.: Investor sentiment and the stock market’s reaction to monetary policy. J. Banking Finance 34, 139–149 (2010)CrossRef

Kuttner, K.: Monetary policy surprises and interest rates: evidence from the fed funds futures markets. J. Monetary Econ. 47, 523–544 (2001)CrossRef

Lobo, B.: Asymmetric effects of interest rate changes on stock prices. Financial Rev. 35, 125–144 (2000)CrossRef

Lobo, B.: Interest rate surprises and stock prices. Financial Rev. 37, 73–92 (2002)CrossRef

Lobo, B., Darrat, A., Ramchander, S.: The asymmetric impact of monetary policy on currency markets. Financial Rev. 41, 289–303 (2003)CrossRef

Nikkinen, J., Sahlström, P.: Impact of Federal Open Market Committee’s meetings and scheduled macroeconomic news on stock market uncertainty. Int. Rev. Financial Anal. 13, 1–12 (2004)CrossRef

Sakar, A.: Liquidity risk, credit risk, and the Federal Reserve’s responses to the crisis. Financial Mark. Portfolio Manag. 23, 335–348 (2009)CrossRef

Savor, P., Wilson, M.: How much do investors care about macroeconomic risk? University of Pennsylvania, evidence from scheduled macroeconomic announcements. Working paper (2010)

Vähämaa, S., Äijö, J.: The Fed’s Policy decisions and implied volatility. J. Futures Mark. 31, 995–1010 (2010)CrossRef

Wang, J.: Trading and hedging in S&P 500 spot and futures markets using genetic programming. J. Futures Mark. 20, 911–942 (2000)CrossRef

Whaley, R.: Understanding the VIX. J. Portfolio Manag. 35, 98–105 (2009)CrossRef

Title: VIX changes and derivative returns on FOMC meeting days
Authors: Kevin Krieger
Nathan Mauck
Denghui Chen
Publication date: 01-09-2012
Publisher: Springer US
Published in: Financial Markets and Portfolio Management / Issue 3/2012
Print ISSN: 1934-4554
Electronic ISSN: 2373-8529
DOI: https://doi.org/10.1007/s11408-012-0191-4

Springer Professional

Abstract

Please log in to get access to your license.

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Springer Professional "Wirtschaft"

Other articles of this Issue 3/2012

Financial frictions and real implications of macroprudential policies

Editorial

On the robustness of risk-based asset allocations

David Larcker and Brian Tayan: Corporate governance matters—a closer look at organizational choices and their consequences

Any regulation of risk increases risk