| September 09, 2013
Seeking a Behavioral Response to Information: News Analytics and VIX Futures Prices
While the authors could look at several securities markets for a suggestion of changing investor risk preferences, one asset class directly reflects the market’s current discount rate for risk, implied volatility. To measure investor’s changing risk expectations the authors have chosen therefore to look at the response of CBOE Volatility Index® (VIX®) futures prices to news stories about employment.
They used Open/High/Low/Closing data for the serial front-month (first to expire)
provided by CQG Inc. for the calendar year 2012.
The authors chose RavenPack’s Global Macro Database for their analysis and limited their story selection to periods when
VIX futures were open for trading
during the calendar year 2012. They also limited our analysis to stories with a “newness” ranking of 90 or above out of a possible 100, which indicates the news event is new for the day.
Against that backdrop, we would suspect that “Positive Employment News” would be perceived as influencing Fed policy to be less accommodative and stimulate a Risk-Off response from investors, putting upward
pressure on VIX futures
. Contrariwise, “Negative Employment News” would be perceived as conducive to a continuation of Fed accommodation or a delay in “tapering” which in turn would stimulate a Risk-On investor reaction and a decline in
VIX futures prices
Seeking evidence of an impact on risk expectations that either builds or persists over a period of time that would likely allow for broad investor, access, analysis and response to news, the authors looked at one-minute lognormal returns RT(ln) using the closing price of the first minute that a VIX future traded following a news story released during a period of time that the VIX future was open for trading. They generated a return for each minute that a VIX future traded over the subsequent 90 minute period using the last trade price during that minute.
The authors created return histograms using these returns. These histograms, therefore, do not demonstrate returns that could have been achieved but instead show in a general sense if collectively investors’ perception of risk increased and persisted, positive VIX returns from “mark”, or collectively investors in risk assets like stocks and bonds breathed a sigh of relief and VIX returns were negative.
The authors believe this method moderates extreme but unique returns and highlights persistent changes.
Where they have graphed a path for the
VIX future’s price
, closing prices were carried forward for minutes in which no trades occurred for continuity.
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