This study examines the stock price adjustment process around announcements of changes in the federal funds rate target in the 1990s using an asymmetric autoregressive exponential GARCH model (ASAR-EGARCH). We find that target change announcements convey new information to the stock market. Risk aversion increases before the announcement of a rate change, and especially before the announcement of a joint target and discount rate change. The volatility estimates suggest that such joint rate changes send a clearer signal to the stock market about monetary policy objectives relative to unilateral target changes. Our findings are consistent with overreaction in the wake of bad news (rate hikes), and point to a shift in volatility from before to after the rate change announcement since the adoption of the immediate disclosure policy of the Federal Open Market Committee in February 1994.
This paper examines the impact of unexpected changes in the federal funds target on stock prices from 1988 to 2001. Measures of interest rate surprises are constructed from survey data and changes in the 3‐month T‐bill yield. I find that surprises associated with decreases in the target cause stock prices to rise significantly. Surprises associated with increases in the target increase stock market volatility on the announcement day, with volatility reverting to pre‐surprise levels on the day after the announcement. This volatility pattern is only evident since 1994. An implication is that concerns about immediate disclosure causing persistent and heightened stock market volatility might be misplaced.
We examine the impact of U.S. elections and partisan politics on the stock market using jump± diffusion models of daily stock returns from 1965 to 1996. Our approach permits us to track jump risk in stock markets stemming from political incentives, and to separate the impact of routine trading and informational surprises, or jumps, on the mean and volatility of stock returns in election years and across partisan administrations. Our estimates reveal that the pattern of jumps and of routine trading varies with the political calendar. We find that midterm elections are a more important source of uncertainty compared to presidential elections. Jump risk increases by 10 and 20 percent for small and large-cap stocks, respectively, in midterm election years. We also find that small stocks perform better under Democrats relative to Republicans. However, unexpected events are more frequent during Democratic administrations and these increase the jump risk, especially for large stocks, in these regimes. D
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