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Intra–day Behavior of Treasury Sector Index Option Implied Volatilities around Macroeconomic Announcements
Author(s) -
Heuson Andrea J.,
Su Tie
Publication year - 2003
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/1540-6288.00040
Subject(s) - treasury , economics , volatility (finance) , implied volatility , cash , index (typography) , financial economics , volatility smile , monetary economics , econometrics , finance , archaeology , world wide web , computer science , history
If option implied volatility is an unbiased, efficient forecast of future return volatility in the underlying asset, then we should be able to predict its path around macroeconomic announcements from responses in cash markets. Regressions show that volatilities rise the afternoon before announcements that move cash markets, and that post–announcement volatilities return to normal as rapidly as cash prices do. Although implied volatilities are predictable, the Treasury options market is efficient since informed traders do not earn arbitrage profits once we account for trading costs.