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The Impact of the Federal Reserve Bank's Open Market Operations

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  • Campbell R. Harvey
  • Roger D. Huang

Abstract

The Federal Reserve Bank has the ability to change the money supply and to shape the expectations of market participants through their open market operations. These operations may amount to 20% of the day's volume and are concentrated during the half hour known as `Fed Time'. Using previously unavailable data on open market operations, our paper provides the first comprehensive examination of the impact of the Federal Reserve Bank's trading on both fixed income instruments and foreign currencies. Our results detail a dramatic increase in volatility during Fed Time. Surprisingly, the Fed Time volatility is higher on days when open market operations are absent. In addition, little systematic differences in market impact are observed for reserve-draining versus reserve-adding operations. These results suggest that the financial markets correctly anticipate the purpose of open market operations but are unable to forecast the timing of the operations.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4663.

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Date of creation: Feb 1994
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Publication status: published as Harvey, Campbell R. and Roger D. Huang. "The Impact Of The Federal Reserve Bank's Open Market Operations," Journal of Financial Markets, 2002, v5(2,Apr), 223-257.
Handle: RePEc:nbr:nberwo:4663

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  1. Pierluigi Balduzzi & Edwin J. Elton & T. Clifton Green, 1997. "Economic News and the Yield Curve: Evidence from the U.S. Treasury Market," New York University, Leonard N. Stern School Finance Department Working Paper Seires, New York University, Leonard N. Stern School of Business- 98-005, New York University, Leonard N. Stern School of Business-.
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  4. Graciela L. Kaminsky & Karen K. Lewis, 1993. "Does foreign exchange intervention signal future monetary policy?," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 93-1, Board of Governors of the Federal Reserve System (U.S.).
  5. Ederington, Louis H & Lee, Jae Ha, 1993. " How Markets Process Information: News Releases and Volatility," Journal of Finance, American Finance Association, American Finance Association, vol. 48(4), pages 1161-91, September.
  6. Richardson, Matthew & Smith, Tom, 1991. "Tests of Financial Models in the Presence of Overlapping Observations," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 4(2), pages 227-54.
  7. Ronen, Tavy, 1997. "Tests and Properties of Variance Ratios in Microstructure Studies," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 32(02), pages 183-204, June.
  8. Michael J. Fleming & Eli M. Remolona, 1999. "Price Formation and Liquidity in the U.S. Treasury Market: The Response to Public Information," Journal of Finance, American Finance Association, American Finance Association, vol. 54(5), pages 1901-1915, October.
  9. Harvey, Campbell R & Huang, Roger D, 1991. "Volatility in the Foreign Currency Futures Market," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 4(3), pages 543-69.
  10. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, Econometric Society, vol. 50(4), pages 1029-54, July.
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Cited by:
  1. Akay, Ozgur (Ozzy) & Cyree, Ken B. & Griffiths, Mark D. & Winters, Drew B., 2012. "What does PIN identify? Evidence from the T-bill market," Journal of Financial Markets, Elsevier, Elsevier, vol. 15(1), pages 29-46.
  2. Anderson, Torben G. & Bollerslev, Tim & Diebold, Francis X. & Vega, Clara, 2002. "Micro Effects of Macro Announcements: Real-Time Price Discovery in Foreign Exchange," Working Papers, University of Pennsylvania, Wharton School, Weiss Center 02-1, University of Pennsylvania, Wharton School, Weiss Center.
  3. Leonardo Bartolini & Alessandro Prati, 2003. "Cross-country differences in monetary policy execution and money market rates' volatility," Staff Reports, Federal Reserve Bank of New York 175, Federal Reserve Bank of New York.
  4. Choi, Hyunyoung & Finnerty, Joseph, 2006. "Impact study on the interest rate futures market," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 46(4), pages 495-512, September.
  5. Alain Durré, 2006. "The Liquidity Premium in the Money Market: A Comparison of the German Mark Period and the Euro Area," German Economic Review, Verein für Socialpolitik, Verein für Socialpolitik, vol. 7, pages 163-187, 05.
  6. Sweeney, Richard J., 2007. "Fed intervention, dollar appreciation, and systematic risk," Journal of International Money and Finance, Elsevier, Elsevier, vol. 26(2), pages 167-192, March.
  7. Bruce Mizrach & Christopher J. Neely, 2007. "The microstructure of the U.S. treasury market," Working Papers, Federal Reserve Bank of St. Louis 2007-052, Federal Reserve Bank of St. Louis.
  8. Kucuk, Ugur N., 2009. "Dynamic Sources of Sovereign Bond Market Liquidity," MPRA Paper 19677, University Library of Munich, Germany.
  9. Tarun Chordia & Asani Sarkar & Avanidhar Subrahmanyam, 2003. "An empirical analysis of stock and bond market liquidity," Staff Reports, Federal Reserve Bank of New York 164, Federal Reserve Bank of New York.
  10. Pilegaard, Rasmus & Durré, Alain & Evjen, Snorre, 2003. "Estimating risk premia in money market rates," Working Paper Series, European Central Bank 0221, European Central Bank.

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