Board of Governors of the Federal Reserve System

Figure 1. Forward option-implied premiums

This figure reports forward daily equity risk premiums for the U.S. (panel A) and the euro-area (panel B). Forward equity risk premiums are calculated as differences in the Gao and Martin (2021) LVIX measure using options that span the release and those that expire right before the release. For each forward period, the LVIX is a weighted average of the price of out-of-the-money puts and calls empirically similar to the VIX volatility index. Under certain conditions, LVIX provides a lower bound approximation to the forward equity risk premium (see Gao and Martin, 2021 and Londono and Samadi, 2023 for details). Daily estimates of forward premiums are averaged over the week prior to a given event. We examine the change in unemployment release for Germany (blue squares), CPI releases for the euro area, France, and Germany (blue circles), GDP releases for Germany and France (blue triangles), ECB policy rate announcements (blue diamonds), U.S. nonfarm payrolls (bold red squares), U.S. CPI (bold red circles), U.S. GDP (bold red triangles), and FOMC announcements (bold red diamonds). We also mark the French first-round and runoff elections, U.S. presidential election, and German elections with purple stars. We remove trading days during April and May 2025 associated with the April 2025 tariff announcements.

Prescheduled economic releases, mostly those related to inflation (the blue and red circles) and monetary policy announcements (the diamonds), are relevant to the eyes of investors in equity markets during this time period. Their importance fluctuates over time, with the largest euro-area inflation release premiums concentrated in the period of tightening that started to wane at the end of 2023, where days with inflation and monetary policy releases consistently command a higher risk compensation than other forward periods. At least for our sample period, euro-area employment (the squares) and, except for a few episodes, euro-area and U.S. output (the triangles) releases do not seem to command additional risk compensation compared to other forward periods.

Certain foreign economic releases appear to be relevant to domestic equity investors in our sample. For both the U.S. and the euro area, domestic inflation releases consistently command higher risk premiums compared to neighboring dates, while only certain foreign inflation releases command relatively high equity risk premiums. Foreign policy rate announcements typically do not command significantly higher risk premiums during our sample. Major elections in the euro area and the U.S. command the largest event risk premiums in domestic, and, in some cases, foreign markets, with magnitudes significantly larger than those for economic releases.

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