Macroeconomic Information Driven Risk-Return Trade-Off

With the impact of high-density macroeconomic information shocks,the complexity of financial markets and the improvement of trading speed has intensified the intraday risks of the stock market.In the short window of macroeconomic announcements,excess returns and high volatility coexist,and the risk-return trade-off is increasingly characterized by high-frequency fluctuations and non-linear correlations.The Law of the People’s Republic of China on Futures and Derivatives clearly points out that the government supports the development of derivatives markets’ functions on price discovery,risk management and resource allocation.In this context,this paper measures the intraday returns and risks based on minute-level data of China’s 50 ETF,300ETF,and I300 index prices and option implied volatility.We study the risk-return tradeoff around Chinese macroeconomic announcements,and focus on the forward-looking information about macroeconomic risks contained by the high-frequency changes of implied volatility.To understand the intraday changes of risks and returns driven by macroeconomic information,we extend the information driven volatility theory proposed by Ai et al.(2022).We believe that the high-frequency fluctuations of implied volatility and risk premium reflect the accumulation and resolution of uncertainty risk around the announcements.If the public economic information carried by the announcements can reduce the uncertainty of future stock prices,the implied volatility will decrease.And the information content of the announcements is positively correlated with the decrease of implied volatility.After the announcements release,with the complete resolution of uncertainty risks,the stock market receives the highest cumulative premium.Furthermore,we find that the correlation between short-term return and implied volatility around the announcements is negative,and exhibits an asymmetric characteristic-that is,the negative correlation is more significant after bearish announcements,which is consistent with volatility feedback theory.More important,compared with the US market,we find that the risk-return trade-off in the Chinese market highlights investors’ irrationality when facing positive announcements.As market risk increases and decreases,the Chinese option implied volatility will show two opposite investor sentiments,namely "fear" and "greed".With the impact of positive announcements,the greedy sentiment of investors will offset the volatility feedback effect,resulting in a special positive correlation between risks and returns.Finally,according to the information transmission hypothesis,new economic information may receive early reactions in the options market.Prior to the release of macroeconomic announcements,the informed traders will prioritize trading in the options market;After the announcements,the options market will lead the stock market in pricing new macroeconomic information.The empirical results indicate that the Chinese options implied volatility contains forward-looking information about macroeconomy and stock future earnings,and has stronger forecasting power within the announcements window.Meanwhile,we find that the implied volatility is more risk-sensitive around the bearish news,and thus can be applied to the intraday prediction and management of extreme macroeconomic risks in Chinese market.