Dissertation
Essays on the Effects of FOMC Announcement: Pre-Announcement Premium and Option Trading Activity
Doctor of Philosophy (PhD), Washington State University
01/2009
Handle:
https://hdl.handle.net/2376/16739
Abstract
This dissertation consists of two essays. Essay 1 proposes a rational expectations equilibrium model for pre-scheduled economic announcements to examine the effect of information uncertainty and liquidity trading on the pre-announcement premium. The model predicts that pre-announcement premium is positively related to information uncertainty of the upcoming announcements. Liquidity traders withdraw their trading when the information uncertainty is high, which leads informed investors to trade less aggressively. As a result, the price is less informative, which elevates pre-announcement premium. We use Volatility Index (VIX) as a proxy of information uncertainty and show that empirical results are mostly consistent with model predictions. Essay 2 investigates options trading activity prior to Federal Open Market Committee (FOMC) announcements. We find informed traders use option to speculate on their private information. Specifically, abnormal trading volume of call option on S&P500 index three to two trading days prior to the FOMC announcement positively predicts post-announcement index return, and this predictability mainly comes from near-the-money call option and from buyer-initiated call option trading when we further breakdown trading volume based on the direction of trade. We find no evidence of investors using options to hedge post-FOMC announcement market risk.
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Details
- Title
- Essays on the Effects of FOMC Announcement
- Creators
- Guanzhong Pan
- Contributors
- George J. Jiang (Advisor)David A. Whidbee (Committee Member)Sheen Liu (Committee Member)
- Awarding Institution
- Washington State University
- Academic Unit
- Carson College of Business
- Theses and Dissertations
- Doctor of Philosophy (PhD), Washington State University
- Number of pages
- 89
- Identifiers
- 99900581708401842
- Language
- English
- Resource Type
- Dissertation