Janne Äijö

The Fed’s Policy Decisions and Implied Volatility

This paper examines how the Fed’s monetary policy decisions affect the implied volatility of the S&P 500 index. The results show that stock market uncertainty is significantly affected by the Fed’s policy decisions. In particular, we find that implied volatility generally decreases after FOMC meetings, while the relationship between target rate surprises and market uncertainty appears positive. However, our results also suggest that the apparent positive relationship between policy surprises and implied volatility is mostly driven by the volatility-reducing effects of negative surprises. We further document that implied volatility is affected by both scheduled and unscheduled policy actions, with the scheduled path surprises having the strongest impact on volatility. Finally, our findings indicate that the impact of monetary policy decisions on implied volatility is more pronounced during periods of expansive policy.

Equity volatility connectedness across China’s real estate firms and financial institutions

Abstract The study investigates the dynamic equity volatility connectedness across the major real estate firms, banks, and other financial institutions in China. Based on the relative level of equity volatility connectedness, the study also examines the systemic importance of real estate firms and banks. The study shows that despite widespread worries about potential real estate bubbles in China, total directional connectedness from real estate firms to banks has decreased over the sample period. In contrast, total directional connectedness from banks to the real estate firms and to the financial institutions has become stronger over the sample period, which implies stronger risk originating from the banking sector. The study also shows that size plays an important role in determining the systemic importance of a real estate firm to the banking sector. The largest real estate firm displays the highest average systemic importance ranking. However, size does not appear to be the determinant factor of the systemic importance of a bank to the financial system. The largest bank shows the lowest average systemic importance ranking and 70% probability of being the least or second least systemically important bank in the long run.

Where Is the “Meat” in Smart Beta Strategies?

In this study, the authors use principal component analysis (PCA) to address the relevance and style mix of four common smart beta strategy indexes: minimum volatility, momentum, fundamental value, and equal weight. They discover that the major proportion of equity smart beta beyond a market-cap-weighted index originates from the momentum smart beta strategy, while, for example, the value smart beta strategy has little relevance. The authors’ results show that returns to different smart beta strategies are partly driven by the same factor exposures related to multifactor models of asset pricing.