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Words that shake traders

Listed author(s):
  • Rosa, Carlo
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    This paper investigates the effects of Federal Reserve's decisions and statements on U.S. stock and volatility indices (Dow Jones Industrial Average, NASDAQ 100, S&P 500, and VIX) using a high-frequency event-study analysis. I find that both the surprise component of policy actions and official communication have statistically significant and economically relevant effects on equity indices, with statements having a much greater explanatory power of the reaction of stock prices to monetary policy. For instance, around 90% of the explainable variation in S&P 500 is due to the surprise component of Fed's statements. This paper also shows that equity indices tend to incorporate FOMC monetary surprises within 40min from the announcement release. Finally, I find that these results are robust along several dimensions. In particular, I consider different estimators, such as the Generalized Empirical Likelihood, and I extend the sample to include the recent period of heightened financial stress. This sensitivity analysis corroborates that central bank communication about its future policy intentions is a key driver of stock returns.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0927539811000491
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    Article provided by Elsevier in its journal Journal of Empirical Finance.

    Volume (Year): 18 (2011)
    Issue (Month): 5 ()
    Pages: 915-934

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    Handle: RePEc:eee:empfin:v:18:y:2011:i:5:p:915-934
    DOI: 10.1016/j.jempfin.2011.07.005
    Contact details of provider: Web page: http://www.elsevier.com/locate/jempfin

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