The Price of Macroeconomic Uncertainty: Evidence from Daily Options

Juan M. Londono and Mehrdad Samadi ()
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Mehrdad Samadi: https://www.federalreserve.gov/econres/mehrdad-samadi.htm

No 1376, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Using recently available daily S&P 500 index option expirations, we examine the ex ante pricing of uncertainty surrounding key economic releases and the determinants of risk premia associated with these releases. The cost of insurance against price, variance, and downside risk is higher for options that span U.S. CPI, FOMC, Nonfarm Payroll, and GDP releases compared to neighboring expirations. We calculate release-driven forward equity and variance risk premia and find that premia vary considerably across economic releases and increase with risk aversion as well as with monetary policy and real economic uncertainty. The empirical framework presented in this paper can be used to examine the ex ante pricing of a wide variety of events.

Keywords: variance risk; uncertainty; risk premium; macroeconomic releases; Federal Open Market Committee (FOMC); inflation; tail risk (search for similar items in EconPapers)
JEL-codes: E44 G1 G12 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2023-06
New Economics Papers: this item is included in nep-rmg and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:96660

DOI: 10.17016/IFDP.2023.1376

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