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Macroeconomic uncertainty and the cross-section of option returns

Sirio Aramonte

Journal of Financial Markets, 2014, vol. 21, issue C, 25-49

Abstract: I empirically investigate whether macroeconomic uncertainty is a priced risk factor in the cross-section of equity and index option returns. The analysis employs a non-linear factor model, estimated with the Fama-MacBeth methodology, where the macroeconomic uncertainty factor is the return on a long/short portfolio of equity options, built on the basis of how implied volatilities change around macroeconomic announcements. I find that macroeconomic uncertainty is priced in the cross-section of option returns, even after controlling for a number of relevant factors. The results are robust to alternative ways of measuring option returns, and to the non-random pattern of missing returns.

Keywords: Option pricing; Macroeconomic uncertainty; Scheduled announcements (search for similar items in EconPapers)
JEL-codes: G12 G13 G14 (search for similar items in EconPapers)
Date: 2014
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DOI: 10.1016/j.finmar.2014.06.001

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