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The impact of FOMC statements on the volatility of asset prices

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  • Mira Farka
  • Adrian R. Fleissig

Abstract

This article examines the impact of Federal Open Market Committee (FOMC) statements on asset prices. Statements are found to have a much more pronounced impact on the volatility of asset prices than interest rate surprises. They influence primarily stock returns, intermediate and long-term yields, whereas short-term rates are driven both by statements and by interest rate surprises. We also find that the regime shift of May 1999 has improved the effectiveness of monetary policy, as reflected in an overall reduction in market volatility during the most recent regime. In addition, markets are equally well-prepared for the upcoming rate decision in both regimes, but the process of adjustment depends on whether a statement was issued in the old regime or not. When a statement is issued, price adjustments are very similar across both periods, whereas if no statement is issued then the rate of adjustment towards the new value is more gradual and occurs throughout the entire intermeeting period.

Suggested Citation

  • Mira Farka & Adrian R. Fleissig, 2013. "The impact of FOMC statements on the volatility of asset prices," Applied Economics, Taylor & Francis Journals, vol. 45(10), pages 1287-1301, April.
  • Handle: RePEc:taf:applec:45:y:2013:i:10:p:1287-1301
    DOI: 10.1080/00036846.2011.615732
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    File URL: http://hdl.handle.net/10.1080/00036846.2011.615732
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    References listed on IDEAS

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    1. Andrew J Swiston, 2007. "Where Have the Monetary Surprises Gone? The Effects of FOMC Statements," IMF Working Papers 07/185, International Monetary Fund.
    2. Selva Demiralp, 2001. "Monetary policy in a changing world: rising role of expectations and the anticipation effect," Finance and Economics Discussion Series 2001-55, Board of Governors of the Federal Reserve System (U.S.).
    3. Tao Wu, 2001. "Monetary policy and the slope factor in empirical term structure estimations," Working Paper Series 2002-07, Federal Reserve Bank of San Francisco.
    4. Monika Piazzesi, 2005. "Bond Yields and the Federal Reserve," Journal of Political Economy, University of Chicago Press, vol. 113(2), pages 311-344, April.
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    Cited by:

    1. Imlak Shaikh & Puja Padhi, 2013. "RBI’s Monetary Policy and Macroeconomic Announcements: Impact on S&P CNX Nifty VIX," Transition Studies Review, Springer;Central Eastern European University Network (CEEUN), vol. 19(4), pages 445-460, March.

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