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Monetary Momentum

Author

Listed:
  • Andreas Neuhierl
  • Michael Weber

Abstract

We document a large return drift around monetary policy announcements by the Federal Open Market Committee. Stock returns start drifting up 25 days before expansionary monetary policy surprises, whereas they decrease before contractionary surprises. The cumulative return difference across expansionary and contractionary policy decisions amounts to 2.5% until the day of the policy move and continues to increase to more than 4.5% 15 days after the meeting. The return drift is a market-wide phenomenon, holds for all industries, and many international equity markets. In the cross section of stocks, size, value, profitability, and investment do not exhibit differential return drifts. Momentum is an exception, because past losers plummet around contractionary monetary policy surprises. A simple trading strategy exploiting the drift around FOMC meetings increases Sharpe ratios relative to a buy-and-hold investment by a factor of 4.

Suggested Citation

  • Andreas Neuhierl & Michael Weber, 2017. "Monetary Momentum," CESifo Working Paper Series 6648, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_6648
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    return drift; policy speeches; expected returns; macro news;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • 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
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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