Premium for heightened uncertainty: Explaining pre-announcement market returns

Abstract

for comments. We thank Meiling Chen and Zhe Geng for research assistance. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

Does the Federal Open Market Committee cycle affect credit risk?

“…13 shows that the biweekly pattern is large and significant in the early sample period (January 2005 to March 2011) and becomes less pronounced in the later sample period (April 2011 to May 2017). Consistent with the finding in Hu et al (2021), this result suggests that the financial markets have become more efficient over time.…”

“…Lastly, our paper provides empirical support for many explanations for FOMC and presents evidence on channels through which monetary policy affects credit risk. Our paper provides support to the risk-based explanations for the impact of FOMC on asset prices (Ai & Bansal, 2018;Hu et al, 2021;Kroencke et al, 2021;Wachter & Zhu, 2018). We document the resolution of macroeconomic uncertainty by the Federal Reserve and show that the Fed affects the CDS market via unexpected information signals and monetary policies that lead to the reductions in the risk premium.…”

“…Hu et al (2021) find that the pre-FOMC announcement drift seems to have become weaker over time, suggesting that the stock market has become more efficient. Does the credit market exhibit the similar effect?…”

“…We first analyze whether the resolution of macroeconomic uncertainty is important for CDS returns over the even weeks in the FOMC cycle. 17 We include the VIX as a proxy for macroeconomic uncertainty (Hu et al, 2021) in our baseline regression. The regression results are reported in Table 9.…”

Market Reaction to Demonstration Events

“…While research on the impact of published information on capital markets is still limited, our research aims to contribute to the literature by demonstrating the effect of disruption caused by demonstrations on market returns. Bhambhwani (2022), Almaqableh et al (2022), and Hu et al (2022) show that there are abnormal returns on the days around the date the event occurs. Their study is also reinforced by Peress and Schmidt (2020), who show that there is potential for disruptive capital market trading when sensational news coverage is published.…”