The Fed’s Policy Decisions and Implied Volatility

Journal of Futures Markets, Vol. 31, No. 10, pp. 995-1010, 2011

21 Pages Posted: 25 Mar 2010 Last revised: 29 Nov 2011

See all articles by Sami Vähämaa

Sami Vähämaa

University of Vaasa

Janne Jaakko Äijö

University of Vaasa, Department of Accounting and Finance

Date Written: October 8, 2010

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.

Keywords: monetary policy decisions, implied volatility, stock market uncertainty

JEL Classification: E44, E52, E58, G10, G13

Suggested Citation

Vähämaa, Sami and Äijö, Janne Jaakko, The Fed’s Policy Decisions and Implied Volatility (October 8, 2010). Journal of Futures Markets, Vol. 31, No. 10, pp. 995-1010, 2011. Available at SSRN: https://ssrn.com/abstract=1574763 or http://dx.doi.org/10.2139/ssrn.1574763

Sami Vähämaa

University of Vaasa ( email )

P.O. Box 700
Vaasa, FI-65101
Finland
+358 29 449 8455 (Phone)

HOME PAGE: http://www.uva.fi/~sami

Janne Jaakko Äijö (Contact Author)

University of Vaasa, Department of Accounting and Finance ( email )

P.O. Box 700
FIN-65101 Vaasa
Finland

HOME PAGE: http://www.uwasa.fi/~jja

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