The impacts of public news announcements on intraday implied volatility dynamics

• Author: Jieun Lee,Doojin Ryu
• DOI: http://doi.org/10.1002/fut.22002
• Published date: 01 June 2019
• Date: 01 June 2019

Received: 20 August 2018

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Revised: 23 January 2019

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Accepted: 23 January 2019

DOI: 10.1002/fut.22002

RESEARCH ARTICLE

The impacts of public news announcements on intraday

implied volatility dynamics

Jieun Lee

1

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Doojin Ryu

2

1

Economic Research Institute, The Bank

of Korea, Seoul, Republic of Korea

2

College of Economics, Sungkyunkwan

University, Seoul, Republic of Korea

Correspondence

Doojin Ryu, College of Economics,

Sungkyunkwan University, 25‐2,

Sungkyunkwan‐ro, Jongno‐gu, Seoul

03063, Republic of Korea.

Email: sharpjin@skku.edu

Abstract

We examine the responses of intraday option‐implied volatilities to scheduled

announcements of macroeconomic indicators. The increase in implied volatility

around macroeconomic news announcements is more pronounced for puts than

for calls and is stronger for announcements made during trading hours than for

those made during nontrading hours. These effects are also more pronounced in

the crisis and postcrisis periods than in the precrisis period. Monetary policy

announcements have a more substantial impact on volatility than other

announcements have, even after controlling for news surprise components.

The impact appears to be greater for policy rate hikes than for policy rate cuts.

KEYWORDS

event study, implied volatility, intraday data, KOSPI 200 options, macroeconomic news

announcement

JEL CLASSIFICATION

E52, G10, G14

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INTRODUCTION

This study analyzes market participants’reactions, as measured by option‐implied volatility dynamics, to six scheduled

macroeconomic news announcements using intraday data on KOSPI 200 options contracts, which are among the most

actively traded derivative assets worldwide. The state of the economy is a fundamental component of the price generation

process; consequently, as soon as new economic indicators are released, investors update asset prices through trading.

Numerous studies examine the effects of macroeconomic news announcements on financial markets. For example, studies

addresstheeffectsoftheseannouncementsonprices,volatility, and liquidity in bond markets (Balduzzi, Elton, & Green,

2001; Fleming & Remolona, 1999; Yang, Ahn, Kim, & Ryu, 2017), stock markets (Becker, Finnerty, & Friedman, 1995; Jones,

Lin, & Masih, 2005; Lee, Ryu, & Kutan, 2016), foreign exchange markets (Andersen & Bollerslev, 1998a), and natural gas

futures markets (Gu & Kurov, 2018). However, relatively few studies analyze the effects of macroeconomic news

announcements on options markets (Chen & Clements, 2007; Ederington & Lee, 1996; Nofsinger & Prucyk, 2003), and the

theoretical and empirical evidence regarding volatility changes around these announcementsissomewhatcontradictory.

Previous studies examine the incorporation of public information into variables of interest, such as price, volume,

and volatility. Such studies specifically focus on the effects that arise before and after public news announcements. Two

theoretical analyses suggest mechanisms through which informed traders exploit their informational advantages

related to these announcements.

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Glosten and Milgrom (1985) assert that informed traders with private information

J Futures Markets. 2019;39:656–685.wileyonlinelibrary.com/journal/fut656

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© 2019 Wiley Periodicals, Inc.

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In the case of public information, informed traders are likely to gain information advantages owing to their superior ability to forecast or reprocess publicly available data (Ahn, Kang, & Ryu, 2008,

2010; Chung, Elder, & Kim, 2013; Kurov, Sancetta, Strasser, & Wolfe, 2019; Ryu, 2011, 2016).

about impending announcements exploit their informational advantages before such announcements, as the value of

the private information disappears after the information is made public. Kim and Verrecchia (1994) assume that traders

cannot possess private information about public news before its announcement and assert that certainty traders, who

transform public information into private information using their superior abilities to process and interpret newly

released information, create information asymmetries after public announcements (Ryu, 2015; Webb, Ryu, Ryu, & Han,

2016). Thus, the effect of public information on various securities markets remains an open empirical question.

The empirical evidence regarding this question is also mixed. Jones, Lamont, and Lumsdaine (1998) describe the

financial market response around these announcements as the “calm‐before‐the‐storm effect,”supporting the findings

of Kim and Verrecchia (1994). Using daily frequency data from the US market, Bomfim (2003) finds that volatility

appears to decrease before an announcement (calming effect) and increase during the announcement (storm effect).

Ederington and Lee (1996), in contrast, offer evidence for the hypothesis that announcements resolve uncertainty,

supporting the finding of Glosten and Milgrom (1985). Specifically, they show that uncertainty is high before important

scheduled news releases because market participants know in advance that the news will create large price changes but

that uncertainty then falls along with the level of information asymmetry after such announcements, as the source of

the uncertainty disappears. Because these results are primarily based on daily or lower frequency data from developed

countries, it is unclear how the financial market response to macroeconomic news announcements may differ across

different datasets (e.g., data from emerging rather than developed markets), frequencies (e.g., higher vs. lower

frequencies), and sample periods.

Thus, in this study, we try to shed additional light on the effects of macroeconomic news announcements on options

market dynamics

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by analyzing intraday data from the KOSPI 200 index options market. Investors of various types

actively participate in this market owing to its lower transaction costs and market frictions compared to other markets.

Specifically, our objectives are to comprehensively examine the effect of macroeconomic news announcements on the

dynamics of various implied volatilities, which reflect option market participants’aggregate opinions and prudence,

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and to identify the factors that change these implied volatilities in response to such announcements. Because implied

volatility dynamics describe and capture investors’expectations (i.e., assessments of future volatility), fears, and

sentiment changes better than historical volatilities do, we focus on implied volatility indices as our primary variable of

interest; moreover, these indices forecast future market states better than historical volatilities do (Han, Guo, Ryu, &

Webb, 2012; Han, Kutan, & Ryu, 2015; Song, Park, & Ryu, 2018; Song, Ryu, & Webb, 2016, 2018).

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We employ the

implied volatilities of calls and puts as proxies for greed and fear, respectively (Park, Kutan, & Ryu, 2019; Uhl, 2018), to

examine whether the asymmetry in the implied volatility response to macroeconomic news announcements arises

because of investors’different reactions to potential increases or decreases in prices.

Using intraday data for KOSPI 200 options over the sample period of January 2006 to June 2014, we measure the effect

of public information releases on implied volatility over 15‐min intervals surrounding the release times. Our dataset

includes high‐frequency implied volatility measures estimated for different types of options (e.g., call and put options,

options with varying degrees of moneyness, etc.). We use an event study methodology for which we collect scheduled

announcements regarding six major economic indicators: the monetary policy interest rate (Base rate), consumer price

index (CPI), gross domestic product (GDP), unemployment rate (UE), industrial production index (IP), and balance of

trade (BoT).

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We assess the impactsof announcements related to theseindicators on several implied volatility measures by

first pooling announcements for all six indicators and analyzing their collective impact and then performing the same

analyses for announcements of each indicator. We also examine the variation in announcement effects depending on

announcement timing (e.g., trading and nontrading hours) and economic conditions (e.g., precrisis, crisis, and postcrisis

subsamples). Further, we consider the influence of the direction of a monetary policy decision on both the effects of other

macroeconomic news announcements and that of the monetary policy decision itself.

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Informed traders are likely to prefer trading options over stocks owing to options’greater leverage effects (Black, 1975), greater price volatility (Donders, Kouwenberg, & Vorst, 2000), quicker response

to new information (e.g., Chan, Chung, & Johnson, 1993; Easley, O’Hara, & Srinivas, 1998; Jong & Donders, 1998), and different information properties depending on option type and moneyness (Kim

& Ryu, 2015; Lee, Kang, & Ryu, 2015; Sim, Ryu, & Yang, 2016).

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The characteristics and properties of Korea's options‐implied volatilities are discussed in Section 2.

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Although implied, historical, and realized volatilities all measure volatility, the concept of implied volatility is somewhat different. Volatility itself is defined using a physical probability measure, and

historical and realized volatilities are processes reflecting this objective (i.e., physical) probability measure (Andersen & Bollerslev, 1998b; Barndorff‐Nielsen & Shephard, 2002). In contrast, implied

volatility is defined using a risk‐neutral probability measure that incorporates both the physical volatility measure and a risk premium that reflects investors’risk appetites and attitudes toward risk.

Thus, this study examines the combined effect of macroeconomic news on physical volatility and market participants’risk appetites, assessments, and sentiments. We appreciate this valuable

suggestion from an anonymous referee.

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We focus on announcements for these six macroeconomic indicators because forecast consensus data, which are necessary to compute the surprise components, are only available for these measures.

In addition, these indicators are considered to be major economic indicators that include inflationary and labor market development and the current and perceived states of the Korean economy.

LEE AND RYU

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