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The pre-FOMC announcement drift

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  • David O. Lucca
  • Emanuel Moench

Abstract

Since the Federal Open Market Committee (FOMC) began announcing its policy decisions in 1994, U.S. stock returns have on average been more than thirty times larger on announcement days than on other days. Surprisingly, these abnormal returns are accrued before the policy announcement. The excess returns earned during the twenty-four hours prior to scheduled FOMC announcements account for more than 80 percent of the equity premium over the past seventeen years. Similar results are found for major global equity indexes, but not for other asset classes or other economic news announcements. We explore a few risk-based explanations of these findings, none of which can account for the return anomaly.Since the Federal Open Market Committee (FOMC) began announcing its policy decisions in 1994, U.S. stock returns have on average been more than thirty times larger on announcement days than on other days. Surprisingly, these abnormal returns are accrued before the policy announcement. The excess returns earned during the twenty-four hours prior to scheduled FOMC announcements account for more than 80 percent of the equity premium over the past seventeen years. Similar results are found for major global equity indexes, but not for other asset classes or other economic news announcements. We explore a few risk-based explanations of these findings, none of which can account for the return anomaly.

Suggested Citation

  • David O. Lucca & Emanuel Moench, 2011. "The pre-FOMC announcement drift," Staff Reports 512, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:512
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    References listed on IDEAS

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    1. Campbell, John Y. & Hentschel, Ludger, 1992. "No news is good news *1: An asymmetric model of changing volatility in stock returns," Journal of Financial Economics, Elsevier, vol. 31(3), pages 281-318, June.
    2. Savor, Pavel & Wilson, Mungo, 2013. "How Much Do Investors Care About Macroeconomic Risk? Evidence from Scheduled Economic Announcements," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 48(02), pages 343-375, April.
    3. Pastor, Lubos & Stambaugh, Robert F., 2003. "Liquidity Risk and Expected Stock Returns," Journal of Political Economy, University of Chicago Press, vol. 111(3), pages 642-685, June.
    4. David Hirshleifer & James N. Myers & Linda A. Myers & Siew Hong Teoh, 2004. "Do Individual Investors Drive Post-Earnings Announcement Drift? Direct Evidence from Personal Trades," Finance 0412003, EconWPA.
    5. Refet S Gürkaynak & Brian Sack & Eric Swanson, 2005. "Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary Policy Actions and Statements," International Journal of Central Banking, International Journal of Central Banking, vol. 1(1), May.
    6. repec:hrv:faseco:30747159 is not listed on IDEAS
    7. David O. Lucca & Francesco Trebbi, 2009. "Measuring Central Bank Communication: An Automated Approach with Application to FOMC Statements," NBER Working Papers 15367, National Bureau of Economic Research, Inc.
    8. Michael J. Fleming & Eli M. Remolona, 1999. "Price Formation and Liquidity in the U.S. Treasury Market: The Response to Public Information," Journal of Finance, American Finance Association, vol. 54(5), pages 1901-1915, October.
    9. Owen Lamont & Andrea Frazzini, 2007. "The Earnings Announcement Premium and Trading Volume," NBER Working Papers 13090, National Bureau of Economic Research, Inc.
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    Keywords

    Federal Open Market Committee ; Equity ; Stocks - Rate of return ; Bank investments ; Banks and banking; Foreign ; International finance;

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