Resolving macroeconomic uncertainty in stock and bond markets
By: Alessandro Beber, Michael W. Brandt.
Contributors: Brandt, Michael W.; National Bureau of Economic Research.
Series: NBER working paper series -- no. 12270.; Working paper series (National Bureau of Economic Research) -- working paper no. 12270.
Publisher: National Bureau of Economic Research
Published: 2006
Place of publication: Cambridge, Mass
Language: eng
Number of pages: 35
Subjects: Macroeconomics; Stocks -- Mathematical models; Bond market -- Mathematical models
Description: "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"--National Bureau of Economic Research web site.
Notes: "May 2006"

Includes bibliographical references (p. 21-22).

Also available in PDF from the NBER world wide web site (www.nber.org).