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The Puzzling Pre-FOMC Announcement “Drift”

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Abstract

For many years, economists have struggled to explain the ?equity premium puzzle??the fact that the average return on stocks is larger than what would be expected to compensate for their riskiness. In this post, which draws on our recent New York Fed staff report, we deepen the puzzle further. We show that since 1994, more than 80 percent of the equity premium on U.S. stocks has been earned over the twenty-four hours preceding scheduled Federal Open Market Committee (FOMC) announcements (which occur only eight times a year)?a phenomenon we call the pre-FOMC announcement ?drift.?

Suggested Citation

  • David O. Lucca & Emanuel Moench, 2012. "The Puzzling Pre-FOMC Announcement “Drift”," Liberty Street Economics 20120711, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:86814
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    File URL: https://libertystreeteconomics.newyorkfed.org/2012/07/the-puzzling-pre-fomc-announcement-drift.html
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    More about this item

    Keywords

    stock market; equity premium puzzle; FOMC;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G1 - Financial Economics - - General Financial Markets

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