New Economics Papers
on Market Microstructure
Issue of 2009‒06‒10
two papers chosen by
Thanos Verousis

  1. Return and Volatility Reactions to Monthly Announcements of Business Cycle Forecasts: An Event Study Based on High-Frequency Data By Entorf, Horst; Groß, Anne; Steiner, Christian
  2. Structural The Equity Premium and the Volatility Spread: The Role of Risk-Neutral Skewness By Bruno Feunou; Jean-Sébastien Fontaine; Roméo Tedongap

  1. By: Entorf, Horst; Groß, Anne; Steiner, Christian
    Abstract: This article contributes to the literature on macroeconomic announcements and their impact on asset prices by investigating how the 15-second Xetra DAX returns reflect the monthly announcements of the two best known business cycle forecasts for Germany, i.e. the ifo Business Climate Index and the ZEW Indicator of Economic Sentiment. From the methodological point of view, the main innovation lies in disentangling ‘good’ macroeconomics news from ‘bad’ news, and, simultaneously, considering time intervals with and without confounding announcements from other sources. Releases from both institutes lead to an immediate response of returns occurring 15 seconds after the announcements, i.e. within the first possible time interval. Announcements of both institutes are also clearly and immediately reflected in the volatility, which remains at a significantly higher level for approximately two minutes slightly elevated for approximately 15 minutes. Combining returns and volatility in a GARCH(1,1)-model, the paper reveals that significant increases in volatility only show up in the presence of simultaneous news released by other sources, whereas return reactions can be observed irrespective of whether confounding announcements are published or not.
    Keywords: event study, announcement effect, high-frequency data, intraday data
    JEL: E44 G12 G14
    Date: 2009
  2. By: Bruno Feunou; Jean-Sébastien Fontaine; Roméo Tedongap
    Abstract: We introduce the Homoscedastic Gamma [HG] model where the distribution of returns is characterized by its mean, variance and an independent skewness parameter under both measures. The model predicts that the spread between historical and risk-neutral volatilities is a function of the risk premium and of skewness. In fact, the equity premium is twice the ratio of the volatility spread to skewness. We measure skewness from option prices and test these predictions. We find that conditioning on skewness increases the predictive power of the volatility spread and that coefficient estimates accord with theory. In short, the data do not reject the model's implications for the equity premium. We also check the model's implications for option pricing and show that the information content of skewness leads to improved in-sample and out-of-sample pricing performances as well as improved hedging performances. Our results imply that expanding around the Gaussian density is restrictive and does not offer sufficient flexibility to match the skewness and kurtosis implicit in option data. Finally, we document the term structure of option-implied volatility, skewness and kurtosis and find that time-dependence in returns has a greater impact on skewness.
    Keywords: Financial markets
    JEL: G12 G13
    Date: 2009

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