Volatility smiles and the information content of news

Fabio Fornari () and Antonio Mele

Applied Financial Economics, 2001, vol. 11, issue 2, 179-186

Abstract: The paper investigates whether the impact of selected news - scheduled and un-scheduled - affects only the current conditional variance of financial prices or, by bringing new information to the market, induces also a revision of the implied variance, i.e. the variance expected to prevail over the life to maturity of an option. The latter phenomenon would signal that news is able to change permanently the consensus on the future economic environment. In addition to recent similar ana lyses which employ the at the money implied volatility to this aim, tests are also performed on the implied out of money and in the money volatilities. These are in fact extremely sensitive to lack of information about the future evolution of the price of the underlying asset: hence, their prices - as well as their implied volatilities - must change significantly after the occurrence of important events.

Date: 2001
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DOI: 10.1080/096031001750071578

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