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The cross section of the monetary policy announcement premium

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  • Ai, Hengjie
  • Han, Leyla Jianyu
  • Pan, Xuhui Nick
  • Xu, Lai

Abstract

Using the expected option-implied variance reduction to measure the sensitivity of stock returns to monetary policy announcement surprises, this paper shows monetary policy announcements require significant risk compensation in the cross section of equity returns. We develop a parsimonious equilibrium model in which FOMC announcements reveal the Federal Reserve’s private information about its interest-rate target, which affects the private sector’s expectation about the long-run growth-rate of the economy. Our model accounts for the dynamics of implied variances and the cross section of the monetary policy announcement premium realized around FOMC announcement days.

Suggested Citation

  • Ai, Hengjie & Han, Leyla Jianyu & Pan, Xuhui Nick & Xu, Lai, 2022. "The cross section of the monetary policy announcement premium," Journal of Financial Economics, Elsevier, vol. 143(1), pages 247-276.
    • Handle: RePEc:eee:jfinec:v:143:y:2022:i:1:p:247-276
    DOI: 10.1016/j.jfineco.2021.07.002
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    3. Zihuang Huang & Xiaoyu Zhang & Kaifeng Li, 2024. "The Impact of CSI SEEE Carbon Neutral Index Launched on Order Aggressiveness," JRFM, MDPI, vol. 17(5), pages 1-20, May.
    4. Fousseni Chabi-Yo & Chukwuma Dim & Grigory Vilkov, 2023. "Generalized Bounds on the Conditional Expected Excess Return on Individual Stocks," Management Science, INFORMS, vol. 69(2), pages 922-939, February.
    5. Rodnyansky, A. & Timmer, Y. & Yago, N., 2023. "Intervening against the Fed," Cambridge Working Papers in Economics 2357, Faculty of Economics, University of Cambridge.
    6. Yun, Jaesun & Kwon, Kyung Yoon, 2023. "Biweekly performance of low-risk anomalies over the FOMC cycle," Finance Research Letters, Elsevier, vol. 58(PC).
    7. Pejman Peykani & Mostafa Sargolzaei & Amir Takaloo & Shahla Valizadeh, 2023. "The Effects of Monetary Policy on Macroeconomic Variables through Credit and Balance Sheet Channels: A Dynamic Stochastic General Equilibrium Approach," Sustainability, MDPI, vol. 15(5), pages 1-21, March.

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    More about this item

    Keywords

    FOMC announcement; Implied variance; Cross section; Equity returns;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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