European banking sector options' reaction to scheduled European macroeconomic news announcements and ECB Governing Council meetings

Abstract

This thesis investigates how scheduled European and German macroeconomic news and ECB Governing Council policy rate meetings affect implied volatilities in the Eurozone during the sample period of 3.1.2005–5.8.2010. A banking industry sector approach is chosen by examining the discrepancies between the reactions of the EURO STOXX 50 index option and the EURO STOXX Banks index option. Along with the ECB Governing Council meetings, six macroeconomic news announcements are chosen based on their anticipated influence on market uncertainty. The chosen macronews are Eurozone Producer Price Index (PPI), Eurozone Consumer Price Index (CPI) and Eurozone unemployment rate alongside with their German counterparts. By using dummy variables, a regression analysis is conducted to evaluate the significance of the chosen news releases and ECB Governing Council meetings.

Empirical results indicate that scheduled European macroeconomic news announcements have only a limited effect on market uncertainty in Europe on both, market level and in the banking sector. Statistically significant influence of German PPI is observed with both indices. The implied volatility falls on these announcement days as hypothesized. All other examined macroeconomic news releases seem to have an insignificant effect. Furthermore, the anticipated increase of implied volatility during days without scheduled news releases is observed with both options, but the result is not statistically significant.

Furthermore, the banking sector appears to be affected by scheduled ECB Governing Council meetings. However, as opposed to findings in earlier studies around the subject, the implied volatility seems to increase during days with scheduled ECB Governing Council meetings.