Resolving Macroeconomic Uncertainty in Stock and Bond Markets

36 Pages Posted: 14 Mar 2006

See all articles by Alessandro Beber

Alessandro Beber

Cass Business School; Centre for Economic Policy Research (CEPR)

Michael W. Brandt

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: May 2006

Abstract

We establish an empirical link between the ex-ante uncertainty about macroeconomic fundamentals and the ex-post resolution of this uncertainty in financial markets. We measure macroeconomic uncertainty using prices of economic derivatives and relate this measure to changes in implied volatilities of stock and bond options when the economic data is released. We also examine the relationship between our measure of macroeconomic uncertainty and trading activity in stock and bond option markets before and after the announcements. Higher macroeconomic uncertainty is associated with greater reduction in implied volatilities. Higher macroeconomic uncertainty is also associated with increased volume in option markets after the release, consistent with market participants waiting to trade until economic uncertainty is resolved, and with decreased open interest in option markets after the release, consistent with market participants using financial options to hedge macroeconomic uncertainty. The empirical relationships are strongest for long-term bonds and weakest for non-cyclical stocks.

Keywords: Macroeconomic uncertainty, implied volatility

JEL Classification: G12, G13, G14

Suggested Citation

Beber, Alessandro and Brandt, Michael W., Resolving Macroeconomic Uncertainty in Stock and Bond Markets (May 2006). AFA 2007 Chicago Meetings Paper; EFA 2006 Zurich Meetings Paper. Available at SSRN: https://ssrn.com/abstract=890379 or http://dx.doi.org/10.2139/ssrn.890379

Alessandro Beber (Contact Author)

Cass Business School ( email )

London, EC2Y 8HB
Great Britain

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Michael W. Brandt

Duke University - Fuqua School of Business ( email )

1 Towerview Drive
Durham, NC 27708-0120
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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