The Price of Macroeconomic Uncertainty: Evidence from Daily Options

55 Pages Posted: 6 Sep 2023

See all articles by Juan M. Londono

Juan M. Londono

Board of Governors of the Federal Reserve System

Mehrdad Samadi

Board of Governors of the Federal Reserve System

Date Written: June, 2023

Abstract

Using recently available daily S&P 500 index option expirations, we examine the ex ante pricing of uncertainty surrounding key economic releases and the determinants of risk premia associated with these releases. The cost of insurance against price, variance, and downside risk is higher for options that span U.S. CPI, FOMC, Nonfarm Payroll, and GDP releases compared to neighboring expirations. We calculate release-driven forward equity and variance risk premia and find that premia vary considerably across economic releases and increase with risk aversion as well as with monetary policy and real economic uncertainty. The empirical framework presented in this paper can be used to examine the ex ante pricing of a wide variety of events.

Keywords: variance risk, uncertainty, risk premium, macroeconomic releases, Federal Open Market Committee (FOMC), inflation, tail risk

JEL Classification: E44, G1, G12

Suggested Citation

Londono, Juan M. and Samadi, Mehrdad, The Price of Macroeconomic Uncertainty: Evidence from Daily Options (June, 2023). International Finance Discussion Paper No. 1376, Available at SSRN: https://ssrn.com/abstract=4557479 or http://dx.doi.org/10.17016/IFDP.2023.1376

Juan M. Londono (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Mehrdad Samadi

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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