When no news is good news – The decrease in investor fear after the FOMC announcement

Abstract

This paper examines the impact of FOMC announcements on the intraday behavior of the VIX and VIX futures. We find that the VIX and the VIX futures start to decline immediately after the FOMC announcement, and this decline persists for about 45 minutes after the announcement. The VIX declines by about 3% on announcement days, whereas the nearest term VIX futures contract declines by about 1.40% around the announcement. We further note that the decline in the VIX and VIX futures is inversely related to the increase in realized volatility around the FOMC announcement. We show that on days with an FOMC announcement, a trading strategy, going short on the VIX futures at the start of the day and closing the position at the end of the same day, yields a return of about 10% p.a.

Does increased hedging lead to decreased price efficiency? The case of VIX ETPs and VIX futures

“…For the second‐nearby VIX futures, we observe that the average price level increases to 22.38 . This result is well‐documented in the literature (Fernandez‐Perez et al., ; Shu & Zhang, ; Szado, ; Whaley, , among others), and is due to the term structure of VIX futures, on average, being in contango. The second‐nearby VIX futures contract presents similar characteristics to the first‐nearby VIX futures, that is, positive skewness, excess kurtosis, autocorrelation close to 1 and the presence of a unit root.…”

“…() who find that VXX leads the short‐term VIX futures index in terms of price discovery. In a related study, Fernandez‐Perez, Frijns, and Tourani‐Rad () examine the intraday patterns in the VIX and its futures around Federal Open Market Committee (FOMC) announcements. The authors document that both VIX and VIX futures display a gradual decline lasting for about 45 min following the FOMC announcement.…”

Volatility jumps and macroeconomic news announcements

“…The “tent‐shaped” pattern in RV has also been documented in prior studies using daily data (Bomfim, ; Lobo, ) and high‐frequency data for even shorter windows surrounding announcements (Andersson, ; Chuliá, Martens, & van Dijk, ; Farka, ; Lucca & Moench, ). Similarly, a decline in IV coinciding with announcements is reported by Nikkinen and Sahlström (), Vähämaa and Äijö (), Gospodinova and Jamali (), and Fernandez‐Perez, Frijns, and Tourani‐Rad (). As noted in section 1, option‐IV is a forward‐looking measure of the market's uncertainty over the underlying asset.…”

“…For example, the impact of macro news on equities has been studied by Thorbecke (), Thornton (), Lobo (, ), Bomfim (), Nikkinen and Sahlström (), Bernanke and Kuttner (), Savor and Wilson (, ), Miao et al (), Scholtus, van Dijk, and Frijns (), Lucca and Moench (), Bernile, Hu, and Tang (), Kurov and Gu (), and Fernandez‐Perez et al, . Interest rates and bonds are studied by Ederington and Lee (), Jones, Lamont, and Lumsdaine (), Fleming and Remolona (), Balduzzi et al (), and Thomakos, Wang, Wu, and Chuderewicz ().…”

Premium for Heightened Uncertainty: Solving the FOMC Puzzle

“…Previous literature has shown that equity returns are predicted, over monthly to annual horizon, by the variance risk premium (Bollerslev, Tauchen, and Zhou (2009) and Zhou (2018)) and simple variance swap (Martin (2017)). Bailey, Zheng, and Zhou (2014) and Fernandez-Perez, Frijns, and Tourani-Rad (2017) analyze high-frequency behavior of VIX, although their focus is not on expected equity returns. We find that a sufficiently large spike-up in daily VIX is already a strong predictor of positive equity returns on the next day.…”