THE CREATION AND RESOLUTION OF MARKET UNCERTAINTY - THE IMPACT OF INFORMATION RELEASES ON IMPLIED VOLATILITY

We model and examine the impact of information releases on market unce rtainty as measured by the implied standard deviation (ISD) from optio n markets, Distinguishing between scheduled and unscheduled announceme nts, we hypothesize that since the timing, although not the content, o f scheduled announcements is known a priori, the pre-release ISD will impound the anticipated impact of important releases on price volatili ty and that the ISD will normally decline post-release as this uncerta inty is resolved. Conversely, we hypothesize that the unexpected high volatility caused by major unscheduled releases will cause market part icipants to adjust upward their estimates of likely volatility over th e remaining life of the option resulting in an increase in the ISD. Ou r evidence supports both hypotheses. The ISDs that we consider are fro m the T-Bond, Eurodollar, and Deutschemark options markets. We examine scheduled macroeconomic news releases such as the employment report a nd the PPI. We also find that the observed tendency for the ISD to fal l on Fridays and rise on Mondays is due to the weekday pattern of sche duled news releases.