The effects of Federal funds rate surprises on S&P 500 volatility and volatility risk premium

Nikolay Gospodinov and Ibrahim Jamali

Journal of Empirical Finance, 2012, vol. 19, issue 4, 497-510

Abstract: In this paper, we examine the effects of expected and surprise components in Federal funds target rate changes on realized and implied volatility. We find that surprise changes in the target rate significantly increase volatility. Consistent with the efficient market hypothesis, our analysis suggests that the expected component of a target rate change as well as the target rate change itself, do not significantly affect volatility. We also show that larger than expected decreases in the Federal funds target rate tend to lower the volatility risk premium.

Keywords: Implied volatility; Realized volatility; Federal funds futures; Monetary policy surprises; Volatility risk premium (search for similar items in EconPapers)
JEL-codes: E44 E52 E58 G11 G13 G14 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (28)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:19:y:2012:i:4:p:497-510

DOI: 10.1016/j.jempfin.2012.04.009

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