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The effects of Federal funds rate surprises on S&P 500 volatility and volatility risk premium

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  • Gospodinov, Nikolay
  • Jamali, Ibrahim

Abstract

In this paper, we examine the effects of expected and surprise components in Federal funds target rate changes on realized and implied volatility. We find that surprise changes in the target rate significantly increase volatility. Consistent with the efficient market hypothesis, our analysis suggests that the expected component of a target rate change as well as the target rate change itself, do not significantly affect volatility. We also show that larger than expected decreases in the Federal funds target rate tend to lower the volatility risk premium.

Suggested Citation

  • Gospodinov, Nikolay & Jamali, Ibrahim, 2012. "The effects of Federal funds rate surprises on S&P 500 volatility and volatility risk premium," Journal of Empirical Finance, Elsevier, vol. 19(4), pages 497-510.
    • Handle: RePEc:eee:empfin:v:19:y:2012:i:4:p:497-510
    DOI: 10.1016/j.jempfin.2012.04.009
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    More about this item

    Keywords

    Implied volatility; Realized volatility; Federal funds futures; Monetary policy surprises; Volatility risk premium;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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