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The impact of macroeconomic information releases on the smile shape

Author

Listed:
  • Hassan Tanha
  • Michael Dempsey

Abstract

Purpose - – The purpose of this paper is to assign fair values to options reduces to the attempt to attribute correct implied volatilities. Here, the authors extend the study by Tanhaet al.(2014) to determine the impact of macro economic announcements on the option smile. Design/methodology/approach - – First, the authors estimate the implied volatility function in terms of moneyness. The authors next analyse the impact of macroeconomic announcements on the estimated coefficients (b0,b1,b2) by regressing the coefficients on the macroeconomic announcements. Findings - – The authors find that in-the-money options are sensitive to such announcements, but that out-of-the money options are not. This is consistent with the interpretation of investor behaviour from prospect theory. Originality/value - – The systematic pricing errors that have been documented using the Black-Scholes model have stimulated attempts to improve the model predictions. The approach uses DVF model to improve the B-S model.

Suggested Citation

  • Hassan Tanha & Michael Dempsey, 2016. "The impact of macroeconomic information releases on the smile shape," Review of Behavioral Finance, Emerald Group Publishing Limited, vol. 8(1), pages 80-90, June.
    • Handle: RePEc:eme:rbfpps:v:8:y:2016:i:1:p:80-90
    DOI: 10.1108/RBF-10-2014-0049
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