Abstract
We examine the link between scheduled Federal Open Market Committee (FOMC) meetings and the VIX measure. Our results indicate that VIX declines significantly on scheduled meeting dates. Unlike prior studies suggesting that the drop in VIX is mechanical, we attribute the decline to the resolution of uncertainty regarding future interest rates provided by the meetings. We examine returns to investable positions on VIX. Though a decline in the VIX level commonly occurs on FOMC meeting dates, we find that significant returns may still be garnered from taking short-VIX positions in derivative markets, even after accounting for the bid-ask spread.
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Notes
A similar finding (Hess et al. 2008) links macroeconomic state and commodity indices in the United States.
Our focus is on scheduled FOMC meetings as we seek to demonstrate predictable effects. Fed actions may be interpreted differently by markets in the case of unscheduled meetings (see, e.g, Sakar 2009).
An asymmetric effect in which negative surprises are met with a larger reaction than positive surprises has also been documented by Lobo et al. (2003) among others.
Bekaert et al. (2010) decompose VIX into uncertainty and risk-aversion components and conclude that lax FOMC meeting policy is related to risk aversion in the medium term and not uncertainty. Our paper differs from theirs in that we focus on the short-term reaction of VIX to scheduled meeting announcements.
While open interest in VIX options has increased since the initiation of the instruments in 2006, the dollar value of VIX option positions is still relatively limited (typically tens of millions of dollars of contracts on FOMC dates). We suspect that further prevalence of VIX options may close trading inefficiencies, but the effect has remained rather consistent to this time.
We thank an anonymous referee for this suggestion.
We thank an anonymous referee for this suggestion and for noting the importance of the market reaction.
Given the small sample sizes, we no longer test for the statistical significance when considering these classifications.
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Acknowledgments
We thank Fred Hays and the seminar participants at the University of West Florida for their helpful comments. We also thank an anonymous referee for detailed, helpful comments on the original draft and the editors of FMPM for their assistance.
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Krieger, K., Mauck, N. & Chen, D. VIX changes and derivative returns on FOMC meeting days. Financ Mark Portf Manag 26, 315–331 (2012). https://doi.org/10.1007/s11408-012-0191-4
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DOI: https://doi.org/10.1007/s11408-012-0191-4