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Pre-announcement effects, news, and volatility: monetary policy and the stock market

  • Antulio N. Bomfim
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    I examine pre-announcement and news effects on the stock market in the context of public disclosure of monetary policy decisions. The results suggest that the stock market tends to be relatively quiet--conditional volatility is abnormally low--on days preceding regularly scheduled policy announcements. Although this calming effect is routinely reported in anecdotal press accounts, it is statistically significant only over the past four to five years, a result that I attribute to changes in the Federal Reserve's disclosure practices in early 1994. The paper also looks at how the actual interest rate decisions of policy makers affect stock market volatility. The element of surprise in such decisions tends to boost stock market volatility significantly in the short run, and positive surprises--higher-than-expected values of the target federal funds rate--tend to have a larger effect on volatility than negative surprises. The implications of the results for broader issues in the finance literature are also discussed.

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    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2000-50.

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    Date of creation: 2000
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    Handle: RePEc:fip:fedgfe:2000-50
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    2. Charles M. Jones & Owen Lamont & Robin L. Lumsdaine, . "Macroeconomic News and Bond Market Volatility," CRSP working papers 333, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
    3. Antulio N. Bomfim & Vincent R. Reinhart, 2000. "Making news: financial market effects of Federal Reserve disclosure practices," Finance and Economics Discussion Series 2000-14, Board of Governors of the Federal Reserve System (U.S.).
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    18. Daniel L. Thornton, 1996. "Does the Fed's new policy of immediate disclosure affect the market?," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 77-88.
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