Working Paper

The Price of Macroeconomic Uncertainty: Evidence from Daily Options

Abstract: Using recently available daily S&P 500 index option expirations, we examine the ex ante pricing of uncertainty surrounding key economic releases and the determinants of risk premia associated with these releases. The cost of insurance against price, variance, and downside risk is higher for options that span U.S. CPI, FOMC, Nonfarm Payroll, and GDP releases compared to neighboring expirations. We calculate release-driven forward equity and variance risk premia and find that premia vary considerably across economic releases and increase with risk aversion as well as with monetary policy and real economic uncertainty. The empirical framework presented in this paper can be used to examine the ex ante pricing of a wide variety of events.

Keywords: variance risk; uncertainty; risk premium; macroeconomic releases; Federal Open Market Committee (FOMC); inflation; tail risk;

JEL Classification: E44; G1; G12;

https://doi.org/10.17016/IFDP.2023.1376

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: International Finance Discussion Papers

Publication Date: 2023-06

Number: 1376