The Fed's policy decisions and implied volatility
Year: 2010
Type: article
Abstract: This paper examines how the Fed’s monetary policy decisions affect the implied volatility of the S&P 500 index. The results show that stock market uncertainty is significantly affected by the Fed’s policy decisions. In particular, we find that implied volatility generally decreases after FOMC meetings, while the relationship between target rate surprises and market uncertainty appears positive. However, our results also suggest that the apparent positive relationship between policy surprises and implied volatility is mostly driven by the volatility-reducing effects of negative surprises. We further document that implied volatility is affected by both scheduled and unscheduled policy actions, with the scheduled path surprises having the strongest impact on volatility. Finally, our findings indicate that the impact of monetary policy decisions on implied volatility is more pronounced during periods of expansive policy.
Source: Journal of Futures Markets
DOI: 10.1002/fut.20503
Authors: Sami Vähämaa, Janne Äijö
Institutions: University of Central Florida, University of Vaasa
Language: English
Subfield: Economics and Econometrics
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W3122579405