Comparing U.S. and European Market Volatility Responses to Interest Rate Policy Announcements

Abstract

We examine the response of U.S. (VIX) and German (VDAX) implied volatility indices to the announcement of interest rate policy decisions by the Federal Open Market Committee (FOMC) and the European Central Bank (ECB). We confirm prior findings that VIX declines on FOMC meetings days. We present new findings that indicate that VDAX declines on FOMC meeting days, but is not related to ECB meeting days. VIX is unrelated to ECB meeting days. Taken collectively, our results indicate a prominent position for the FOMC in determining uncertainty levels both domestically and abroad relative to no relation between uncertainty levels and the ECB. JEL classification: G14, E44

An Analysis of the Growth in the Fixed Income ETF Market

“…The VIX index is referred to as the "fear index" by Whaley [6,7] and is used to measure uncertainty in Nikkinen et al [8] and Bialkowski et al [9], among others. Nikkinen and Sahlstrom [10], Chen and Clements [11], Vahamaa and Aijo [12], Krieger et al [13] and Krieger et al [14] examine FOMC and ECB rate decisions and document VIX declines on FOMC meeting days in the U.S. market. VIX declines following rate decisions are associated with lower uncertainty, further establishing VIX as an uncertainty proxy.…”