MacroSentiment and News

8/12/2019 MacroSentiment and News

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MACRO NEWS DATA RELEASES TO TRADE ON OPTION IMPLIED SENTIMENT

Introduction- Implied Probability Denity !unction

T"i brie# note er$e a a mean to identi#y tradin% opportunitie &"ic" may arie due to

t"e poeion o# uperior in#ormation pertainin% to scheduled macroeconomic data

ne&' &it"in t"e option mar(et) In particular' daily inde* option implied data +&"en

u##iciently li,uid &ill be ued to e*amine t"e #irt . moment alon% &it" rele$ant option

$olume) Reearc" e*amined co$er mainly /S e,uity mar(et' &it" a #e& notable ot"ermar(et included)

T"e 0an( o# En%land +0oE ue implied denity #unction +PD! #or a ran%e o# aet to

calculate t"e probability o# price #allin% into particular ran%e at a daily #re,uency) An

aumption made' &"ic" i conitent &it" t"e met"odolo%y outlined in RND)m' i uc" t"at

mar(et participant are risk neutral investors do not require any compensation forbearing risk) Since in$etor tend to be ri(-a$ere' t"e ri(-neutral PD! 1 ri( neutral

ditribution +RND 1 re#lect bot" pre#erence to&ard ri( and mar(et participant2 3true2PD!) T"e mean o# t"e ditribution i t"en e,ual to t"e #uture price o# t"e aet' &"ic" i

lo&er t"an t"at in a ri(-a$ere &orld) T"i price i ri(-neutral) Ta(en to%et"er' t"eprobabilitie acro t"e poible #uture outcome #orm a probability ditribution #unction)

Option are o#ten &ritten on underlyin% &"ic" are not traded +interet rate and e,uity

indice4 t"ey too can be &ritten on #uture contract a t"e ri( t"erein can be "ed%ed in

option mar(et - t"e maturitie o# bot" contact are o#ten t"e ame)

A option contract approac" e*piry' monitorin% t"e "ape o# t"e PD! and in particular' t"e

diperion' can be "i%"ly in#ormati$e) In t"e intance o# no une*pected "oc(' t"e mar(et

uncertainty and t"ere#ore' $olatility +tandard de$iation can be aumed to decline o$er t"e

li#e o# t"e option) PD! can alo be calculated #or 3contant maturity2 option5 a .6-day

maturity option contructed #rom t"e rele$ant option e*pirie) Mo$ement in t"e PD! &ouldt"en be #ree #rom time-to-maturity e##ect) T"e shapeo# t"e PD! i t"e determinin% #actor o#

t"e mar(et2 e*pectation re%ardin% #uture outcome #or t"at underlyin%) T"e c"an%e in

&idt" +diperion o#ten can be re#lecti$e o# mar(et uncertainty re%ardin% #uture aet price

le$el) T"e degree of asymmetrypro$ide t"e mar(et2 aement o# t"e relati$e ri( o#

#uture aet price mo$e in one direction' relati$e to anot"er) T"i i o#ten meaured by t"e

skewness.T"e de%ree o# 3fatness2 1 amount o# probability attac"ed to outcome t"at are

#ar #rom t"e current underlyin% le$el 1indicate t"e mar(et2 perception re%ardin% e*treme

c"an%e in t"e underlyin% le$el) T"i i meaured by kurtosis1 #atne o# t"e tail) T"u

t"e #ollo&in% ummary tatitic are intructi$e5

Mean5 a meaure o# t"e central tendency &"ic" i t"e e,ui$alent o# t"e #uture price'

in a ri(-neutral &orld)

Standard deviation5 a meaure o# diperion7uncertainty o# t"e PD!) /ually

e*preed a an annualied meaure)

Median5 di$ide t"e PD! into e,ual ma probability)

Skew:meaure t"e de%ree o# aymmetry o# t"e ditribution) T"i meaure t"e

relati$e probabilitie' &ei%"ted by cubic ditance' abo$e and belo& t"e mean+#uture le$el) T"u' poiti$e aymmetry implie mean8median)

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Kurtosis5 pro$ide a meaure o# t"e concentration o# t"e probability in t"e upper and

lo&er tail o# t"e implied PD!) !or a normal ditribution' t"e tandard meaure i .4 it

i location in$ariant and unitle)

Xth percentile5 t"e point o# t"e ditribution #or &"ic" t"ere i an *: probability #or t"e

underlyin% at t"at time to be e,ual to or belo& it i)e) t"e cumulati$e probability) T"elope o# t"e CD! %i$e t"e PD!)

I# t"e underlyin% aet $alue c"an%e dratically' t"e PD! o# t"e return denity may be better

uited to e*amine ummary tatitic) ;ence t"e (e&ne t"at i meaured i baed on t"e

lo% o# t"e current #uture le$el ' o$er t"at o# t"e tri(e 5 ' &"ere repreent t"e ran%e

o# potential #uture $alue o# t"e underlyin%)

T"e ability to calculate PD! depend on li,uidity o# t"e option) It i t"e asymmetry o# t"e

PD! &"ic" can be ued to in#er t"e mar(et $ie& o# t"e relati$e ri( concernin% t"e #uturemo$ement o# aet price) T"e probability attac"ed to t"e underlyin% reac"in% t"e mean o#

t"e ditribution i calculated) ;o&e$er' t"e pread o# t"e outcome around t"e mean i

in#ormati$e)


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T"i pro$ide a meaure o# t"e balance o# ri(4 t"at i' &"et"er t"e ri( are tac(ed in onedirection or anot"er' relati$e to t"i point) T"u' t"e poible probability $alue o# t"e

underlyin% #allin% into re%ion around t"i point can be e*amined) T"e probabilitie #or all

ran%e are determined' in addition to aymmetry o# t"e lo%-return) T"e abo$e %rap"

indicate a ditribution o# t"e underlyin% inde* at maturity' &it" mean=median) T"ere#ore' t"e

balance o# ri( i poiti$e) T"e le#t tail i lon%er t"an t"e ri%"t tail and i t"ere#ore'ne%ati$ely (e&ed) T"i t"en implie t"at ri( are tilted to&ard lo&er' rat"er t"an "i%"er

outcome) It i important to note t"at t"e unit in &"ic" t"e aymmetry i meaured a##ect

t"e reult) T"u t"e probability meaure re#er to t"e ATM #uture le$el o# t"e underlyin%

inde*' &"ilt t"e t"ird robut moment' (e&ne' re#er to t"e lo%-return ditribution) Lo%-

%ro&t" rate are pre#erential to imple +proportional c"an%e becaue o# t"e #ollo&in%5

Aet price are bounded belo& by >ero) T"u' t"e ditribution &ill be naturally

aymmetric) T"u ta(in% natural lo% may alle$iate t"i problem)

Lo% c"an%e remo$e dependency on t"e &ay price are ,uoted)

ero is used as a benchmark for the asymmetry of log!returns" this does not hold for

the #$% of the level of the underlying asset. The slope of the implied volatility smile

determines the shape and therefore, the degree of asymmetry of the implied

PDF/RND. Observed in equity marets is a greater probability atta!hed to lo"er

stries, negative out!omes#

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&ther useful measurements will be: the difference in probability between the mean'

median and mode (most commonly observed value).

T"e #ollo&in% ection co$er reearc" &"ic" illutrate t"e lin( bet&een option-implied

entiment meaure +e*aminin% moment o# t"e RND' uin% $ariou met"od in a number

o# di##erent aet clae' and macroeconomic ne& releae)

Si%nal E*traction1 RND)m

T"e #ollo&in% mar(et "a$e been e*amined5

/SA 1 S?P @66 e,uity inde*4

/ 1 !TSE 966 e,uity inde*4

Autralia 1 ABS


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$ays to -+piry5 number o# calendar day le#t #or t"e #ront mont" contract to e*pire)


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Mar(et e##iciency i e*amined becaue``market participants apparently do take intoaccount the schedule of upcoming announcements in forming their expectations of likely future

volatility.i$en t"at ISD conitently #all #ollo&in% earnin% announcement' t"eye*plore t"e poibility o# a pro#itable tradin% trate%y baed on t"i) T"e employment

report caued t"e ISD to decline 6: o# t"e time in t"eir ample)

Loo(in% at t"e T10ond ample' t"i predictability could not be e*ploited due to con$e*ity

o# option5 on a delta neutral port#olio' lar%e price c"an%e created a lo) A delta-neutral

port#olio aume one &rite put #or eac" call &ritten + re#er to t"e

cumulati$e normal ditribution' i t"e tandard 0lac(-Sc"ole model input) 0ot" call

and put "a$e poiti$e %amma and ince bot" are "orted in uc" a port#olio' t"e

%amma i ne%ati$e) A lar%e increae in t"e underlyin% #uture price &ould create a lo

on a "ort call' not to be o##et by t"e %ain o# a "ort put poition) !or a lar%e drop in t"e

underlyin% price' t"e lo on t"e put e*ceed t"e %ain #rom t"e "ort call poition)

In ummary' ne& announcement tend to lead to a decline in ISD a uncertainty i

reol$ed) Wit" repect to unc"eduled announcement' ISD rie) ;i%" e*pected

$olatility on day t lead to a #all in t"e ISD a t"e uncertainty i reol$ed &"ilt "i%"

une*pected $olatility on day t lead to a rie in t"e ISD a participant re$ie t"eir

etimate o# $olatility o$er t"e li#e o# t"e option)


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Interpretin% e*ce (urtoi i more ue#ul &"en combined &it" ot"er ummary tatitic)Combinin% e*ce (urtoi +ubtractin% . #rom t"e meaure' %i$en t"e e*ce (urtoi o#

t"e normal ditribution in >ero &it" tandard de$iation can be ued to in#er mar(et

e*pectation) W"en t"e e*ce (urtoi increae &it" no c"an%e in t"e econd

moment' t"e mar(et2 e*pectation o# t"e current le$el tend to increae)

T"e abo$e "o& t"e mo$ement o# t"e implied ditribution a t"e underlyin% mar(et le$el

rie5 t"e tandard de$iation and t"e e*ce (urtoi rie and t"e (e&ne "i#t in ane%ati$e direction) Sube,uently' a#ter a "ort time and &it" %radually reco$erin%

tability in t"e mar(et' bot" t"e tandard de$iation and t"e e*ce (urtoi decline' t"e

e*tent o# ne%ati$e "i#t o# t"e (e&ne "rin(' and t"e ditribution approac"e t"at o# a

normal ditribution) T"ey ``2 interpret the changes in implied probability distribution as

capturing the changes in the expectations of a representative investor in the market. 3amely, arepresentative investors expectation of stock price fluctuations will follow a normal distribution in

the long run, although it will exhibit stronger confidence in either a rise or a fall in the short run

reflecting factors such as the current phase of the business cycle. $n summary, for short%term

!hanges in the maret, se"ness "ill !hange in the dire!tion opposite to that of the

maret level, "hile the standard deviation and the e&!ess urtosis in!rease. The !hanges

of these three summary statisti!s sho" ho" maret e&pe!tations have responded to

e&ternal sho!s, and thus tell us the magnitude of any une&pe!ted sho!s that hit the

maret.W"en t"e mar(et le$el i #allin%' t"e (e&ne &ill "i#t in a poiti$e direction'&"ile t"e tandard de$iation and t"e e*ce (urtoi %enerally c"an%e a t"ey do in t"e

cae o# a mar(et rie. /herefore' the case of a market fall is understood by

changing the sign of skewness.


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T"e analyi o# t"e RND o$er t"e abo$ementioned period i conducted' ta(in% into

account t"e condition &it"in t"e apanee economy) Re%ardin% t"e option-implied

moment' t"e aut"or #ind t"at ``2 the standard deviation in!reased "hen sto! pri!es

dropped sharply. This increase in standard deviation is notable in four phases# $%& from end!%)*), when the 3ikkei 1 reached its peak, to the fall of %)), when it fell below 4,- $&

from mid!%))% to mid!%)), when the 3ikkei 1 fell below 4%1, for the first time in the

post!'bubble( period- $0& from the second half of %))0 to early %))/- and $/& from the beginning to

the middle of %))1, when the yen rapidly appreciated and anxiety about a possible deflationary

spiral increased. 5n addition, the level of the standard deviation in!reased after end%'()(,

"hi!h seems to imply that maret parti!ipants be!ame more !ons!ious of the ris of pri!e

volatility after the sto! maret entered its ad*ustment phase.

/he skewness shifted toward a negative value when stock prices were rising and

toward a positive value when stock prices were falling) T"i relation"ip bet&een t"e

mar(et #luctuation and (e&ne i conitent &it" t"eir "ypot"ei t"at t"e adutment

peed o# participant2 con#idence on t"e #uture price &ill become aymmetric bet&een

t"e upper and lo&er direction o# t"e current mar(et le$el accordin% to t"e p"ae o#

mar(et #luctuation) T"e e*ce (urtoi &a ne%ati$e on a$era%e' alt"ou%" t"e e*tent o#

ne%ati$ity decreaed or occaionally re$erted to poiti$e under lar%e price #luctuation

and alo "o&ed a ump in t"e intance o# an e*treme price c"an%e) T"e table belo&

pro$ide t"e correlation o# t"e inde* mo$ement to ummary tatitic) T"e (e&ne

"o&ed a relati$ely "i%" ne%ati$e correlation &it" t"e c"an%e in toc( price) T"e

tandard de$iation and e*ce (urtoi indicated a poiti$e correlation &it" t"e abolute$alue o# daily c"an%e in toc( price)

T"e conclude# `2market participants expectations are too diverse and informative to becaptured merely by using a single summary statistic, i.e., the mean, because the samemean

value implies different maret e&pe!tations and poli!y impli!ations, depending on the

shape of probability distribution of e&pe!ted out!ome.5n particular, since market participants

confidence in stock prices differs substantially depending on timing, we can expect to capture

more market information, both 6ualitatively and 6uantitatively, by carefully examining the changes

in market participants expectations that lie behind stock price fluctuations.

.) Kolatility Smile and t"e In#ormation Content o# Ne& 1 !) !ornari ? A) Mele +


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maturity traded on LI!!E bet&een 9FFH and 9FF) T"e impact o# ne& on t"e terminalpoint o# t"e $olatility mile are elected #rom t"e deepet ITM and OTM option) Ne&

belon% to t&o cate%orie5 +i c"eduled ne&5 CPI' PPI' at-iue yield o# t"e T-bill' repo

rate o# t"e 0an( o# Italy4 +ii unc"eduled ne&5 "eadline ne& #rom t"e Italian leadin%

ne&paper4 ne& pertainin% to t"e $olatility o# t"e e*c"an%e rate +9 or 6' dependin% on

eit"er poiti$e or ne%ati$e mo$ement) T"e tudy &a conducted in accordance &it"paper +9 1 t"ey e*amine t"e e##ect o# ne& on t"e ISD o# option &ritten on #uture

contract &it" t"e "ortet a$ailable maturity) To reiterate' t"e "ypot"ei teted5

;95 IK + tend to #all on day &it" c"eduled ne&4

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c"eduled and unc"eduled ne&4 in %eneral' t"e reult are a e*pected) T"e+unc"eduled ne& coe##icient ta(e a +poiti$e ne%ati$e i%n) In particular' t"e arrival

of unscheduled bad news tends to increase the *0 over the life of the option" good

news does not alter the *0) !or t"e cae o# scheduled news' only t"e release of the

,#* was significant for */M and &/M options' and reduced t"e e*pected $ariance on

day o# c"eduled announcement) T"e lope and (e&ne o# t"e $olatility mile ia##ected by t"i ne& releae5 t"ere2 a reduction in t"e di##erence bet&een out- and

ATM a &ell a bet&een in- and ATM option) In concluion' t"e t"ree e*treme point o#

t"e $olatility mile 1 ITM' ATM and OTM $olatility - are a##ected by t"e arri$al o# ne&)

T"e lope' &"ic" are calculated a t"e di##erence bet&een t"ee conecuti$e point'

are alo related to t"e arri$al o# unc"eduled ne& and t"e releae o# t"e CPI) T"eskewness is only affected by the ,#*)

H) Option Kolume and Kolatility Repone to Sc"eduled Economic Ne& Releae - ) R)

No#in%er ? 0) Prucy( +


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should be high before a scheduled announcement and low after the announcement, when the

uncertainty is resolved. 8eronesi $%)))& formed a rational!expectations model in which the

state of the economy influences investors reaction to news. >pecifically, during an economic

contraction, investors overreact to good news. 5nvestors overreact to bad news during

economic expansion. This result occurs because investors are uncertain whether the current

economic condition is changing when the news is revealed. 9ne outcome of this model is thatprice volatility is predicted to be high when there is greater uncertainty if the current economic

regime is changing. :s our tests are done during a period of good economic growth, the

uncertainty is predicted to occur after receiving bad news. hleifer, and

8ishny $%))*& created a behavioural model for investor reaction to news. Their model

assumes that traders suffer from the cognitive error of the representativeness bias. 3amely,

traders believe that recent news is representative of what can be expected for the future.

Therefore, it could be believed that a good!news surprise would be followed by more good

surprises. Bad news is expected to follow a bad!news surprise. 3ote that this implies that a

bad!news surprise would create a lot of uncertainty for the future. The model also has

implications for post!announcement trading. >pecifically, good!news surprises would cause

traders to enter into positions that reflect optimism for the future, whereas bad!news surprises

would cause them to create pessimistic positions.

5n summary, theory does not provide for clear predictions about the reaction of traders to

public news announcements.

/ncertainty and e*pected ri( are appro*imated by implied $olatility in t"e option

mar(et) T"e abo$e model predict di##erent repone o# t"i $ariable a#ter t"e ne&

announcement: (i) Kim and 0errecchia (3445) predicted an increase in implied

volatility after the announcement" (ii) 6arberis et al. suggests the increase would

only be after bad news" (iii) Kim and 0errecchia (3443b) and -derington and 7ee

(3448) predicted that the implied volatility decreases after the announcement" (iv)

0eronesi (3449) predicted that volatility will increase after bad news in good

economic times and after good news during periods of recession.

T"e reult %enerally are conitent &it" t"e 0arberi et al) and Keronei model) 6ad

news creates high volatility and high volume. ood news elicits lower volume and

is not associated with higher volatility.T"ee reult are not conitent &it" t"e

prediction o# any one model)

Pre$iou literature &"ic" etimate t"e toc( mar(et2 reaction to macroeconomic ne&

i dicued) Mcueen and Roley +9FF. #ind t"at t"e reaction i conditional upon t"e

economic condition) !or e*ample' a surprisingly low unemployment reporti good

news#or t"e economy and the stock market&"en t"e economy i in recession.

T"ere#ore' t"e toc( mar(et react poiti$ely to t"i ne&) A lo& unemployment report in

an e*tended e*panion p"ae o# t"e economy i %ood #or t"e economy4 yet it mi%"t notbe %ood #or t"e toc( mar(et) In$etor may #eel t"at t"i ne& increae t"e li(eli"ood

o# an interet rate increae by t"e #ederal %o$ernment) rise in interest rates

increases the discount rate' making stocks less valuable./in% daily toc(-mar(etreturn' Mcueen and Roley #ound e$idence to upport t"i "ypot"ei) Many tudie

99


12/23

"a$e in$eti%ated t"e reaction o# t"e bond mar(et to macroeconomic announcement5$olume increae 9@ min a#ter t"e announcement' $olatility o# t"e bond price pi(e up

immediately #ollo&in% t"e announcement +one' Lamont' ? Lumdaine' 9FF and t"en

%radually decline o$er t"e ne*t "our +0aldu>>i et al)'


13/23

bond return) T"e reult indicate t"at e+pected bond market volatilities increase in

response to higher!than!e+pected inflation and unemployment announcements. In

particular' it i #ound t"at higher! than!e+pected inflation announcementscaue

option-implied bond return ditribution to become more negatively skewed or less

positively skewed' implyin% a shift in market participants< perceptions toward

future increases in interest rates) Data on erman %o$ernment bond #uture option iued to e*amine t"e impact o# urprie in /S and European macroeconomic ne&

announcement on option-implied bond mar(et e*pectation)

In particular' baed on t"e #indin% o# No#in%er and Prucy( +


14/23

macroeconomic announcement are t"en calculated by ubtractin% t"e mar(ete*pectation #rom t"e actual announcement) Surprie are tandardied by di$idin%

t"rou%" by t"eir ample tandard de$iation) To a$oid time-to-maturity e##ect o# option'

time erie o# option-implied moment &it" a contant maturity o# .6 day are

contructed) T"e contant maturity time erie are obtained by linear interpolation

bet&een t&o adacent maturity implied moment etimate)

T"e moment o# option-implied bond return ditribution are re%reed on t"e urprie

in macroeconomic announcement) T"e reult "o& t"at urprie in in#lation and

unemployment ne& i%ni#icantly a##ect implied $olatilitie o# bot" t"e "ort-term and

lon%-term bond) ;i%"er-t"an-e*pected announcement lead to an increae in implied

$olatility' and lo&er-t"an-e*pected announcement decreae $olatility4 uncertainty in t"e

lon%-term bond i to a lar%er e*tent dri$en by in#lationary ne&) T"e preent #indin%

contradict t"e model o# Ederin%ton and Lee +9FFJ' &"ic" predict t"at implied $olatility

"ould al&ay decreae a#ter macroeconomic ne&' re%ardle o# t"e content o# t"eannouncement) T"e pre$iou tudie "a$e ta(en only t"e announcement e##ect into

account)

0eber and 0randt +


15/23

(e&ed due to lo&er t"an e*pected production #i%ure) T"ee #indin% are reaonable'coniderin% t"at poiti$e +ne%ati$e urprie in production may be conidered bad

+%ood ne& #or t"e bond mar(et) T"eir reult indicate t"at mar(et e*pectation o# #uture

e*treme mo$ement in bond price' a meaured by implied (urtoi' are $irtually

una##ected by macroeconomic ne& releae) ;o&e$er' ome e$idence i #ound

u%%etin% t"at a#ter e*treme urprie in in#lation announcement mar(et participantattac" "i%"er probabilitie #or e*treme mo$ement in bond price)

/hus' actual content of the macroeconomic news announcements needs to be

taken into account when the impact of information releases on financial markets is

being e+amined.

J) T"e E##ect o# Macroeconomic Ne& on 0elie# and Pre#erence5 E$idence #rom t"eOption Mar(et 1A) 0eber ? M) 0randt +


16/23

participant to become le ri( a$ere and #or t"e SPD to be more imilar to t"e PD!)0ad ne& #or t"e bond mar(et implie %ood ne& #or economic propect)

T"e et o# ten ne& announcement i #airly complete in t"at it decribe5 t"e in#lationary

proce by t"e conumer price inde* +CPI and producer price inde* +PPI4 t"e ituation

in t"e labour mar(et by t"e ci$ilian unemployment rate +C/R and non-#arm payroll

+N!P4 t"e dynamic o# conumption by t"e retail ale +RS4 t"e tate o# t"e economy byt"e indutrial production +IP4 t"e percei$ed tate o# t"e economy by conumer

con#idence +CC and t"e national aociation o# purc"ain% mana%er inde* +NAPM4 t"e

condition o# t"e money mar(et by t"e !ederal Open Mar(et Committee #ederal #und

tar%et rate +!OMC and t"e ituation in t"e real etate mar(et by "ouin% tart +;S)

T"e American-tyle option on #uture contract re,uire t"e ue o# a binomial tree

$erion o# t"e 0lac( +9FJ model to compute implied $olatilitie #or eac" option price)

T"e option are orted into i* moneyne cate%orie +t&o %roup o# out-o#-t"e-money

option' t&o %roup o# in-t"e-money option and t&o %roup o# at-t"e-money optionand #our time to maturity cate%orie +ei%"t to .6 day' .6 to J6 day' J6 to 96 day' and

in e*ce o# 96 day) ;ere' moneyne i de#ined a

T"i meaure indicate "o& many tandard de$iation t"e option i ITM or OTM)

Notation i uc" t"at fi t"e #uture le$el' kt"e tri(e' T t"e maturity and t i t"e current

date) i t"e ATM IK)

Option &it" t"e ame maturity and $aryin% moneyne le$el "o& a negative

asymmetry5 t"e a$era%e IK i "i%"er #or #ar ITM and OTM option t"an #or t"e ATM

option) In particular' t"e average *0 is slightly higher for &/M puts than for &/M

call options) T"ere i alo a monotonically increain% term tructure o# a$era%e IK) T"e

poibility o# intra-&ee( and7or intra-day eaonalitie e*it &it"in t"e SPD) T"ey #irt

compare t"e a$era%e ATM implied $olatility and t"e moment o# t"e option-implied SPD

on announcement and non-announcement day #or di##erent day o# t"e &ee( and time

o# t"e day) Coniderin% only day durin% &"ic" at leat one o# t"e ten announcementoccur' t"e /M *0 and the second moment of the option!implied S#$ e+hibit

similar decreasing patterns) Mondays display the highest values and %ridays the

lowest) Monday and !riday are t"e day &it" t"e leat and mot announcement'

repecti$ely +


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announcement days' t"ee t&o meaure are $irtually contant t"rou%"out t"e &ee()T"ere i a li%"t increae in uncertainty on T"urday' t"e mot #re,uent pre-

announcement day' &"ic" i conitent &it" uncertainty bein% %reatet ut prior to t"e

announcement) In concluion' t"e SPD e*"ibit no apparent intra-&ee(ly and intra-daily

eaonalitie ot"er t"an t"oe aociated &it" t"e announcement)

T"e unconditional repone o# t"e SPD pertain to ne&' re%ardle o# &"et"er deemed%ood or bad) T"e aut"or re%re t"e daily c"an%e in t"e ATM IK +td) de$' t"e

abolute $alue o# (e&ne or e*ce (urtoi on t"e dummy $ariable &"ic" indicate

&"et"er an announcement "a occurred +9 implie an occurrence' 6 ot"er&ie) Almot

one t"ird o# t"e $ariance o# t"e day-to-day c"an%e in t"e a$era%e ATM IK i attributable

to t"e announcement) All coe##icient are "i%"ly i%ni#icant &it" ne%ati$e i%n'

conitent &it" t"e intuition t"at t"e announcement reduce uncertainty) T"e tron%et

e##ect i re%itered #or employment) T"e (e&ne and e*ce (urtoi o# t"e option-

implied SPD are not ytematically a##ected by t"e e$ent o# an announcement) T"eyconclude t"at t"e unconditional reduction in uncertainty i almot completely e*erted on

t"e econd moment) Conditionin% on t"e ne& content' t"e ATM IK a &ell a t"e

econd moment o# t"e SPD do not "o& bia to direction o# uc" ne&)

) T"e Impact o# /S and / macroeconomic ne& announcement on t"e return

ditribution implied by !TSE-966 inde* option 1 ) i +


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Some model aume trader cannot obtain pri$ate in#ormation be#ore t"eannouncement) Ot"er aume ome trader ue pri$ate in#ormation "o&e$er t"i

cannot #ully dampen all uncertainty) T"e be"a$ioural model o# 0arbari' S"lei#er and

Ki"ny +9FF aume ,uality o# ne& i auto correlated) S"e#rin and Statman +9F@'

;on% and Stein +9FFF bot" u%%et in$etor react and t"ere#ore trade accordin% to

,uality o# t"e ne& announcement) T"u' in$etor may trade only immediately a#ter%ood ne&' and &it" a delayed reaction a#ter bad ne&)

Macro $ariable #or t"e dometic +/ mar(et5 DP' employment' IP' PPI and MH)

Kariable #or t"e /S5 DP' employment' IP' PPI and NAPM +manu#acturin%) /S

announcement are incorporated into / price &ell be#ore mar(et cloe due to time o#releae +95.6 MT) T"e met"od employed to e*tract t"e ditribution di##er) T"ey

etimate contant maturity indice5


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Conditional on %ood ne&5 IK decreae a#ter a %ood announcement4 (e&ne

tend to increae #ollo&in% %ood ne& +more ri%"t-(e&ed return ditribution)

Implied (urtoi increaed) T"e mot i%ni#icant ne& $ariable &ere / DP'

PPI and MH' a &ell a /S employment' DP and NAPM)

Coniderin% t"e maturity o# option' IK o# "ort maturity option are prone to react moret"an t"oe o# more ditant maturity option) Etimation o# eparate cro-ectional

re%reion #or %ood $eru bad ne& #ind bot" to be di##erent #or "ort and lon% maturity

option) T"i doe not "old #or (e&ne o# option)

*n conclusion: fter bad (good) news' *0 increases (deceases)' skewness becomes

more (less) left!skewed and kurtosis decreases (increases).

C"an%e in t"e "ape o# t"e RND pro$ide in#ormation on t"e c"an%e in toc( mar(et

e*pectation' implied #rom option mar(et) T"u di##erent combination o# c"an%e in

moment imply di##erent e*pectation) I# $olatility and (urtoi bot" increae' t"e ri( o#

price c"an%e are %reater' &it" "i%"er e*pectation attac"ed to e*treme outcome)

Interpretation o# #luctuation in $olatility and e*ce (urtoi5

-+cess kurtosis

Bise %all

0olatility Bise reater ri( on price c"an%e V reater ri( on price c"an%e

V

tron%er e*pectation o# an e*treme outcome &ea(er con#idence in t"e current price

le$el

%all Smaller ri( on price c"an%e V Smaller ri( on price c"an%e V

tron%er con#idence in t"e current price le$el &ea(er e*pectation o# an e*treme

outcome

T"u t"e ,uality o# ne& i a determinin% #actor in t"e mo$ement o# t"e "ape o# t"e implied

ditribution o# return) ;o&e$er' it i important to note t"at t"e tudy ue contant-maturityoption &it" &"ic" to determine uc" e##ect) In practice' time-to-maturity M/ST be

accounted #or)

) E##ect o# Macroeconomic Ne& Announcement on t"e Ri(-Neutral Ditribution5

E$idence #rom opi


20/23

Ni((inen' and Sa"ltrm +


21/23

t"e underlyin% inde* &it" repect to /S PPI and /S IND) ;o&e$er' no conitencycould be #ound re%ardin% moment and ,uality o# ne&)

On an "ourly bai' IK tend to increae and t"e RND become le lepto(urtic a#ter a

ne& announcement) T"i reult i in contrat to t"at o# 0eber and 0randt +ero-beta co$ered option &"ic" are

immune to mar(et ri( and t"e ri( o# t"e underlyin% inde*) T"e beta o# a call i

e*preed a5

cG X

&"ere X i t"e delta o# a $anilla call option' i t"e pot o# t"e inde*' c i t"e price o# t"e

call option) T"e t"eory i uc" t"at i# t"e CAPM70lac(-Sc"ole model "old' t"e e*pected

return on >ero-beta co$ered call "ould be t"e ri(-#ree rate) T"e $iolation o# uc" a

relation"ip aert t"at t"e CAPM70lac(-Sc"ole model cannot u##iciently account #or

t"e ri( in option' and t"ereby t"at option are not redundant) T"ey #ind t"at t&o

cate%orie o# economic acti$ity +E/; and SOI can i%ni#icantly #orecat ne*t-mont"return on bot" call and put acro all moneyne +t"e at-t"e-money +ATM and out-o#-


22/23

t"e-money +OTM option) T"e tron% impact o# t"ee t&o cate%orie o# economicacti$ity can account #or a 9@):- .)9: $ariation +meaured a t"e proportion o# t"e

tandard de$iation o# option return)

To obtain an o$er$ie& o# t"e predicti$e po&er o# economic acti$ity #or option return

acro di##erent moneyne' t"e aut"or proect t"e option return onto t"e in#ormationpace panned by t"e #our cate%orie o# economic acti$ity)

Reult indicate t"at bot" call and put option earn too little a#ter t"e re&ard #or t"e ri(4

t"at i' t"e call and put are li(ely o$erpricin%) E$en &"en t"e ri( i meaured in term

o# t"e 0lac(- Sc"ole beta' t"e call and put till earn too little) Wit" a mar(et ri(

premium o# i* percent per year' t"e ATM put and OTM put "ould earn mont"ly return

around -6)96 and -6)99' repecti$ely' accordin% to t"eir 0lac(-Sc"ole beta) ;o&e$er'

t"e a$era%e mont"ly return o# -6).. and -6)@6 #or ATM and OTM put repecti$ely' are

not conitent &it" t"e 0lac(- Sc"ole7CAPM model) Li(e&ie' t"e a$era%e mont"lyreturn o# 6)69 and -6)9@ #or ATM and OTM call' repecti$ely' are too lo& compared

&it" t"e return o# around 6)96 and 6)9' repecti$ely' accordin% to t"eir 0lac(-Sc"olebeta) Coniderin% t"e a$era%e >ero-beta co$ered option return' t"e i%ni#icant CAPM

alp"a and beta u%%et t"at t"e >ero-beta co$ered option earn return inconitent

&it" t"e ri(-#ree rate' indicatin% t"at t"e return cannot be uti#ied by t"e 0lac(-

Sc"ole7CAPM model) T"e ne%ati$e CAPM alp"a #or call imply t"at' a#ter adutin% #or

t"e ri(' &ritin% >ero-beta co$ered call can earn poiti$e return) Similarly' buyin% >ero-

beta co$ered put can alo obtain abnormal pro#it)

Re%reion reult indicate t"at option return o# call and put acro moneyne are

conitently a##ected by o$erall economic acti$ity) Particularly' o# t"e #our cate%orie'

E/; and SOI are t"e mot rele$ant acti$itie to impact inde* option) T"e reult are

tatitically conitent' e$en &it" t"e ue o# >ero-beta co$ered option return)

!urt"ermore' t"e i%n o# lope coe##icient o# call option in are oppoite to t"oe o# put

option' but t"ey are in t"e ame i%n a#ter controllin% #or mar(et ri() T"e aut"or #indthat ``First, economic activity does capture systematically dynamic patterns in the cross!section of

index option returns. 5n other words, in addition to market risk, e!onomi! a!tivity plays a

signifi!ant role in e&plaining option returns. >econd, e!onomi! a!tivity seemingly highly

!orrelates "ith the returns volatility, in that it impa!ts the !all and put options in the same

dire!tion.This implies a !lose lin bet"een the sto!hasti! volatility and e!onomi! a!tivity,

"hi!h is !onsistent "ith the literature that do!uments the impa!ts of ma!ro fa!tors on the

equity option volatility $see, e.g., 3ofsinger and Arucyk, 0- hen and lements,C- DiE,

*&.

Summary and Concluion

T"e reaction o# t"e toc( and bond mar(et to macroeconomic $ariable "a been

documented e*teni$ely) !rom t"e ri(-return perpecti$e' ome macroeconomic $ariable

"a$e been pro$ed to "a$e ytematical in#luence on toc( return4 #or e*ample' t"e yieldpread' uc" a t"e term pread and de#ault pread +C"en et al)' 9FJ4 !eron and ;ar$ey'


23/23

MacroSentiment and News

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