The Pre-FOMC Announcement Drift

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractSince the Federal Open Market Committee (FOMC) began announcing its policy decisions in 1994, U.S. stock returns have on average been more than thirty times larger on announcement days than on other days. Surprisingly, these abnormal returns are accrued before the policy announcement. The excess returns earned during the twentyfour hours prior to scheduled FOMC announcements account for more than 80 percent of the equity premium over the past seventeen years. Similar results are found for major global equity indexes, but not for other asset classes or other economic news announcements. We explore a few risk-based explanations of these findings, none of which can account for the return anomaly.

Nominal Rigidities and Asset Pricing

“…Savor and Wilson (2013) show that 60% of the equity premium is earned around scheduled macroeconomic news announcements, whereas Lucca and Moench (2013) find that 80% of the equity premium since 1994 is earned in the 24 hours before the FOMC press releases. On the contrary, Campbell, Pflueger, and Viceira (2013) study the impact of monetary policy and macroeconomic shocks on nominal bond premia and the interlinkages with equity markets.…”

Comparing U.S. and European Market Volatility Responses to Interest Rate Policy Announcements

“…Additionally, earlier findings in domestic markets (Nikkinen and Sahlstrom (2004), Chen and Clements (2007), Vahamaa and Aijo (2011) and Krieger et al (2012)) indicate that even scheduled monetary policy meetings move volatility. Furthermore, Lucca and Moench (2011) find that the return of the DAX equity index is 43 basis points higher on FOMC meeting days than on other days. Thus, it appears possible that FOMC meeting days may indeed affect German markets and vice versa.…”

“…9 We focus on German volatility as the data is available from the first ECB meeting through the present period. 10 See for example, Jiang et al (2012) and Lucca and Moench (2011).…”

The Wisdom of Twitter Crowds: Predicting Stock Market Reactions to FOMC Meetings via Twitter Feeds

“…For example, Bernanke and Kuttner (2005) show that an unexpected 25-basispoint cut in the federal funds rate target induces a one percent rise in broad stock indices. One important paper to highlight is that of Lucca and Moench (2015). They show that a significant fraction of the risk premium is earned on the 24 hours before the FOMC decision is announced, and suggests that a strategy that increases its equity holdings on the days before the FOMC decision should outperform the market.…”