Systematic factors, information release and market volatility

Recent several months have demonstrated historical levels of market volatility; sometimes attributed to changes in previously hypothesized systematic risk factors, however many times without any known reason other than the overreaction by market participants. Times like these make it even more important that we have a better understanding of how markets receive and evaluate new information about systematic risk factors such as macroeconomic variables. Despite a strong intuitive notion and established theoretical relationships that these risk factors should influence equity values, few studies have been able to establish this relationship empirically. Previous research has used cash-market prices for equity indices, but perhaps options on those indices are more sensitive to the new information released to the market by the announcement of macroeconomic variables, as suggested by numerous empirical studies supporting the hypothesis that option traders might be a better informed segment of the population. In this study, I examine the impact of a broad set of macroeconomic announcements on equity index options, in search of candidates for priced factors. The data set includes 19 macro announcement series and daily option prices for the period from 1983 to 2002. I find that balance of trade, consumer price index, producer price index, employment, housing starts, money supply and retail sales are associated with higher volatility of index option returns.