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Walking on thin ice: Market quality around FOMC announcements

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  • Rosa, Carlo

Abstract

This paper examines market quality for the E-Mini S&P 500 futures around Federal Reserve announcements. I document that the release of the Federal Open Market Committee (FOMC) statement induces significantly “higher than normal” volatility and trading volume. The bid–ask spread is significantly higher in the minutes preceding the release, but it returns to its “normal” level immediately after the release. Using order-level data, I show that market depth behind the best bid and ask quotes is much lower on event days, hitting an intraday low immediately before the FOMC release at values on average about 20 percent of the level observed in control days.

Suggested Citation

  • Rosa, Carlo, 2016. "Walking on thin ice: Market quality around FOMC announcements," Economics Letters, Elsevier, vol. 138(C), pages 5-8.
    • Handle: RePEc:eee:ecolet:v:138:y:2016:i:c:p:5-8
    DOI: 10.1016/j.econlet.2015.10.029
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    References listed on IDEAS

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    1. Carlo Rosa, 2013. "The financial market effect of FOMC minutes," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 67-81.
    2. Ben S. Bernanke & Kenneth N. Kuttner, 2005. "What Explains the Stock Market's Reaction to Federal Reserve Policy?," Journal of Finance, American Finance Association, vol. 60(3), pages 1221-1257, June.
    3. Jones, Charles M. & Lamont, Owen & Lumsdaine, Robin L., 1998. "Macroeconomic news and bond market volatility," Journal of Financial Economics, Elsevier, vol. 47(3), pages 315-337, March.
    4. Kee H. Chung & John Elder & Jang‐Chul Kim, 2013. "Liquidity and Information Flow around Monetary Policy Announcement," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(5), pages 781-820, August.
    5. Scholtus, Martin & van Dijk, Dick & Frijns, Bart, 2014. "Speed, algorithmic trading, and market quality around macroeconomic news announcements," Journal of Banking & Finance, Elsevier, vol. 38(C), pages 89-105.
    6. Rigobon, Roberto & Sack, Brian, 2004. "The impact of monetary policy on asset prices," Journal of Monetary Economics, Elsevier, vol. 51(8), pages 1553-1575, November.
    7. Erenburg, Grigori & Lasser, Dennis, 2009. "Electronic limit order book and order submission choice around macroeconomic news," Review of Financial Economics, Elsevier, vol. 18(4), pages 172-182, October.
    8. repec:mcb:jmoncb:v:45:y:2013:i::p:781-820 is not listed on IDEAS
    9. F. M. Bandi & J. R. Russell, 2008. "Microstructure Noise, Realized Variance, and Optimal Sampling," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 75(2), pages 339-369.
    10. Gang Shyy & Vasumathi Vijayraghavan & Brian Scott‐Quinn, 1996. "A further investigation of the lead‐lag relationship between the cash market and stock index futures market with the use of bid/ask quotes: The case of France," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 16(4), pages 405-420, June.
    11. Torben G. Andersen & Tim Bollerslev, 1998. "Deutsche Mark-Dollar Volatility: Intraday Activity Patterns, Macroeconomic Announcements, and Longer Run Dependencies," Journal of Finance, American Finance Association, vol. 53(1), pages 219-265, February.
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    Cited by:

    1. Füss, Roland & Grabellus, Markus & Mager, Ferdinand & Stein, Michael, 2018. "Something in the air: Information density, news surprises, and price jumps," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 53(C), pages 50-75.
    2. Smales, L.A., 2019. "Slopes, spreads, and depth: Monetary policy announcements and liquidity provision in the energy futures market," International Review of Economics & Finance, Elsevier, vol. 59(C), pages 234-252.
    3. Smales, L.A. & Lucey, B.M., 2019. "The influence of investor sentiment on the monetary policy announcement liquidity response in precious metal markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 60(C), pages 19-38.
    4. Siikanen, Milla & Kanniainen, Juho & Luoma, Arto, 2017. "What drives the sensitivity of limit order books to company announcement arrivals?," Economics Letters, Elsevier, vol. 159(C), pages 65-68.
    5. Baldauf, Markus & Mollner, Joshua, 2022. "Fast traders make a quick buck: The role of speed in liquidity provision," Journal of Financial Markets, Elsevier, vol. 58(C).
    6. Degiannakis, Stavros & Filis, George & Tsemperlidis, Stefanos, 2018. "Economic announcements and the 10-year US Treasury bond: Surprising findings without the surprise component," MPRA Paper 94176, University Library of Munich, Germany.

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    More about this item

    Keywords

    U.S. Federal Reserve; Central bank announcements; High-frequency data; Market quality;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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