Title: The variance premiums' responses to the ECB monetary announcements

Authors: Tarek Chebbi; Waleed Hmedat

Addresses: Department of Administrative and Financial Sciences, Oman College of Management and Technology, 320 Barka, Sultanate of Oman ' Department of Administrative and Financial Sciences, Oman College of Management and Technology, 320 Barka, Sultanate of Oman

Abstract: We examine how the announcements of the asset purchase programs by the European Central Bank during the period 2009-2015 can be transmitted to stock markets through the risk-taking channel. Our preliminary findings indicate strong evidence in favour of the rejection of the hypothesis of unbiasedness of our selected national implied volatilities. Such findings are by and large compatible with general consensus emerging from literature highlighting the existence of the variance premiums. We extend the analysis to focus on the responses of the variance premiums to such announcements. We find supportive evidence that asset purchase program announcements likely involved the risk-taking channel given that the variance premiums are substantially influenced by monetary surprises embedded in such announcements. It is important to recognise that the risk-taking channel is mostly confined to the SMP programme. Finally, our findings highlight, not surprisingly, an obvious difference in the reactions of the variance premiums to monetary surprises between the crisis and post crisis periods.

Keywords: stock markets; ECB; conditional variance; monetary policy; variance premiums; implied volatility; realised volatility; GARCH model.

DOI: 10.1504/IJTGM.2023.130104

International Journal of Trade and Global Markets, 2023 Vol.17 No.1, pp.51 - 63

Received: 12 Feb 2021
Accepted: 01 Aug 2021
Published online: 05 Apr 2023 *