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Macroeconomic information and implied volatility: evidence from Australian index options

Hassan Tanha (Finance and Financial Services Discipline, College of Business, Victoria University, Melbourne, Australia)
Michael Dempsey (School of Economics, Finance and Marketing, RMIT University, Melbourne, Australia)
Terrence Hallahan (Finance and Financial Services Discipline, College of Business, Victoria University, Melbourne, Australia)

Review of Behavioral Finance

ISSN: 1940-5979

Article publication date: 2 September 2014

496

Abstract

Purpose

The purpose of this paper is to understand that option pricing is the response of option implied volatility (IV) to macroeconomic announcements.

Design/methodology/approach

The authors use high-frequency data on ASX SPI 200 index options to examine the response of option IV, as well as higher moments of the underlying return distribution, to macroeconomic announcements. Additionally, the authors identify the response of the moments as a function of moneyness of the options.

Findings

The findings suggest that in-the-money and out-of-the money options have difference characteristics in their responses, leading to the conclusion that heterogeneity in investor beliefs and preferences affect option IV through the state price density (SPD) function.

Originality/value

The research contributes to the literature that examines whether IV captures the beliefs of market participants about the likelihood of future states together with the preferences of market participants towards these states. In particular, the authors relate changes in option IV to changes in macroeconomic announcements, through the impact of these announcements on the moments of the SPD function.

Keywords

Acknowledgements

JEL Classifications — G13, G14, C58

Citation

Tanha, H., Dempsey, M. and Hallahan, T. (2014), "Macroeconomic information and implied volatility: evidence from Australian index options", Review of Behavioral Finance, Vol. 6 No. 1, pp. 46-62. https://doi.org/10.1108/RBF-01-2014-0006

Publisher

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Emerald Group Publishing Limited

Copyright © 2014, Emerald Group Publishing Limited

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