Scheduled announcements and volatility patterns: the effects of monetary policy committee announcements on LIBOR and short sterling futures and options
Scheduled announcements and volatility patterns: the effects of monetary policy committee announcements on LIBOR and short sterling futures and options
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.
Monetary Policy Committee, repo rate, RPI, LIBOR, interest rate futures, interest rate options, implied volatility, semi-strong efficiency, announcement effects
University of Southampton
Sutcliffe, Charles
1a8ec184-d880-492f-8714-7312c6884105
Sun, Peng
41499e73-cc73-4703-b992-8a1200cfebd4
April 2001
Sutcliffe, Charles
1a8ec184-d880-492f-8714-7312c6884105
Sun, Peng
41499e73-cc73-4703-b992-8a1200cfebd4
Sutcliffe, Charles and Sun, Peng
(2001)
Scheduled announcements and volatility patterns: the effects of monetary policy committee announcements on LIBOR and short sterling futures and options
(Discussion Papers in Accounting and Management Science, 01-177)
Southampton, UK.
University of Southampton
26pp.
Record type:
Monograph
(Discussion Paper)
Abstract
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.
More information
Published date: April 2001
Keywords:
Monetary Policy Committee, repo rate, RPI, LIBOR, interest rate futures, interest rate options, implied volatility, semi-strong efficiency, announcement effects
Identifiers
Local EPrints ID: 35719
URI: http://eprints.soton.ac.uk/id/eprint/35719
ISSN: 1356-3548
PURE UUID: 92eaea56-97a3-4166-bbfe-edeeefae519b
Catalogue record
Date deposited: 25 May 2006
Last modified: 15 Mar 2024 07:54
Export record
Contributors
Author:
Charles Sutcliffe
Author:
Peng Sun
Download statistics
Downloads from ePrints over the past year. Other digital versions may also be available to download e.g. from the publisher's website.
View more statistics