Implied volatility response to scheduled U.S. macroeconomic news announcements: Banking sector approach on Eurex option market

Abstract

This thesis investigates how scheduled macroeconomic news releases affect stock mar-ket uncertainty on industry level. The study takes a banking sector approach by using data from the Eurex option market. For this purpose, an eight–firm market portfolio is constructed to represent the entire market. These eight firms are BASF, Daimler–Chrysler, E. ON, Nokia, RWE, SAP, Siemens, and Total. Proportion to this, a banking sector portfolio is constructed by using seven banks. These banks are Allianz, BNP Paribas, Credit Suisse, Credit Agricole, Deutsche Bank, Societe Generale, and UBS. To examine the impact of the U.S. macroeconomic releases for stock valuation, the behav-ior of these two portfolios’ implied volatilities are investigated.

The study focuses on 7 macroeconomic news announcements selected on the basis of the previous literature and the Bureau of Labor Statistics classifications of major eco-nomic indicators. The 7 macroeconomic news releases are the Employment Report (ER), the Producer Price Index (PPI), the Consumer Price Index (CPI), the National As-sociation of Purchasing Managers Survey (NAPM, Manufacturing), the Import and Ex-port Price Indices (USIEX), Retail Sales, and the Employment Cost Index (ECI). Addi-tion to this, Federal Reserve’s Open Market Committee Meetings are also included to the study.

The reaction of the portfolios’ implied volatilities to the macroeconomic news releases is estimated by using dummy variables in regression analysis. The empirical results show that the U.S. macroeconomic news announcements have significant influence on stock valuation. Moreover, the results convey that the banking sector reacts differently compared to the market reaction. Out of the seven macroeconomic news announcements the Consumer Price Index and the Import and Export Price Indexes seems to have sig-nificant influence in the case of the market portfolio, whereas the bank portfolio reacts only to the NAPM: Manufacturing release with a statistical significance. In addition, Federal Reserve’s FOMC news announcements have significant influence on both port-folios’ stock valuation.