The impact of monetary policy on option-implied stock market expectations

Xiaoyu Wang, Jia Zhai, Dejun Xie*, Jingjing Jiang

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review


Purpose: The purpose of this paper is to investigate the impact of Federal Open Market Committee (FOMC) meetings and the changes of the target rates on stock market uncertainty. Design/methodology/approach: Multivariate regression analysis is applied to the historical data of VIX, FOMC meetings and target rates. Subtle relations are revealed by further categorizing the FOMC meetings into being scheduled and unscheduled and distinguishing the signs of the changes in VIX and target rates. CPI and the prime rate are used for robustness test. Findings: The authors first examine the relation between FOMC meetings and target surprises; the results indicate that unscheduled FOMC meetings heavily impact the target surprises. Then, the authors investigate the relation between FOMC meetings and VIX changes; the results show that both unscheduled and scheduled FOMC meetings impact VIX, where the impacts of scheduled FOMC meetings are more substantial. The authors also analyze the responses of VIX to the target surprises, and the results reveal that there is an asymmetric effect of target surprises on VIX, where the influences of the scheduled positive target surprises are more significant. Finally, by examining the relation between the FOMC meeting and the risk-neutral density of the VIX option, the authors conclude that both KURT and SKEW are more affected by unscheduled FOMC meetings. Originality/value: Deeper dimensions of the relations between VIX, FOMC meetings and target rates are analyzed and more insightful understandings of such relations are gained.

Original languageEnglish
Pages (from-to)37-51
Number of pages15
JournalChina Finance Review International
Issue number1
Publication statusPublished - 22 Jan 2020


  • FOMC
  • Implied volatility
  • Monetary policy
  • Risk-neutral density
  • Target rates


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