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Post-FOMC Drift

Author

Listed:
  • Liang Ma

    (Department of Economics, University of Alberta, Edmonton, AB, Canada)

  • Xiaowen Zhang

    (China Institute, University of Alberta, Edmonton, AB, Canada)

Abstract

We study the patterns of stock returns around the Federal Reserve monetary policy announcements. Much of the existing literature interprets changes in short rates around the announcement windows as policy surprises. In contrast, we follow the “Fed information effect†literature, which posits that financial markets react to central bank announcements not just for unexpected changes in monetary policy stances (monetary policy news), but also for central bank’s assessment of economic conditions (non-monetary policy news). We identify the good/bad news using a combination of sign restrictions with high-frequency financial data. “Bad news†events are times when the market interpreted the Fed decisions/announcements as revealing negative Fed information about the economy, and vice versa for “good news†events. A novel finding is that following bad news events, we observe significantly positive stock returns in a 20-day period. This observation is largely consistent with a story of asymmetric effects of good and bad news on the level of uncertainty. Further analysis shows that the post-FOMC drift to economic news in Fed announcements is a market-wide phenomenon. A trading strategy that buys following “bad news†earns an excess return of 2.5% per year with a Sharpe ratio of 0.43.

Suggested Citation

  • Liang Ma & Xiaowen Zhang, 2023. "Post-FOMC Drift," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 13(03), pages 1-30, September.
    • Handle: RePEc:wsi:qjfxxx:v:13:y:2023:i:03:n:s2010139223500106
    DOI: 10.1142/S2010139223500106
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    More about this item

    Keywords

    Central bank information; sign restriction; return drift;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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