Investor and central bank uncertainty and fear measures embedded in index options
By: Alexander David, Pietro Veronesi
Contributors: Veronesi, Pietro; National Bureau of Economic Research
Series: NBER working paper series -- working paper 16764; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 16764.
Publisher: National Bureau of Economic Research
Published: 2011
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Description: "Investors' option-implied fear measures - implied volatility (ATMIV) and put-call implied volatility ratios (P/C) - lead key macroeconomic variables such as industrial capacity utilization and short term interest rates by up to eight quarters.  We show that this interaction between fear indices, real activity, and policy variables arises in an equilibrium model where investors learn about the trend-growth regimes of economic data, and the central bank uses a learning-based Taylor rule.  The model endogenously generates several time series properties of option prices including the counter (pro) cyclicality of ATMIV (P/C), the V-shape (inverse V-shape) relation between ATMIV (P/C) and monetary policy variables, the positive relation between the level and absolute changes in ATMIV, and an economically significant amount of time variation in the volatility premium"--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 5/10/2011.

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