Identifying Preference for Early Resolution from Asset Prices
52 Pages Posted: 7 Mar 2023
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Identifying Preference for Early Resolution from Asset Prices
Identifying Preference for Early Resolution from Asset Prices
Date Written: October 13, 2022
Abstract
This paper develops an asset market based test for preference for the timing of resolution of uncertainty. Our main theorem provides a characterization of preference for early resolution of uncertainty in terms of the risk premium of assets realized during the period when the informativeness of macroeconomic announcements is resolved. Empirically, we find support for preference for early resolution of uncertainty based on evidence on the dynamics of the implied volatility of S&P 500 index options before FOMC announcements.
Keywords: preference for early resolution of uncertainty, generalized risk sensitivity, macroeconomic announcements, volatility
JEL Classification: D81, G12
Suggested Citation: Suggested Citation