Sutcliffe, Charles and Sun, Peng
Scheduled announcements and volatility patterns: the effects of monetary policy committee announcements on LIBOR and short sterling futures and options. Southampton, UK, University of Southampton, 26pp.
(Discussion Papers in Accounting and Management Science, 01-177).
Both the UK spot and futures markets in short term interest rates are found to react strongly to surprises in the scheduled announcements of the repo rate and RPI. Therefore these announcements should also affect the market for options on short term interest rates. Because the repo rate and RPI announcements are scheduled, the options market can predict the days on which announcement shocks may hit, and build this information into its volatility expectations. A theoretical model is constructed where the volatility used in pricing options alters over time in a predictable non-linear manner that varies with contract maturity and the number of forthcoming announcements; but is independent of announcement content. The empirical results support the response coefficients of this theoretical model, and it is concluded that the UK spot, futures and options markets in short term interest rates are semi-strong efficient.
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