Identifying Preference for Early Resolution from Asset Prices
This paper develops an asset market based test for preference for the timing of resolution of uncertainty. Our main theorem provides a characterization of the representative agent’s preference for early resolution of uncertainty in terms of the risk premium of assets
realized during the period of resolution of informativeness of macroeconomic announcements.
Empirically, we show how data on the dynamics of the S&P 500 index options prices before FOMC announcements can be used to identify investors’ preference for the timing
of resolution of uncertainty.