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A Structural Approach to High-Frequency Event Studies: The Fed and Markets as Case History

Author

Listed:
  • Francesco Bianchi
  • Sydney C. Ludvigson
  • Sai Ma

Abstract

We develop a methodology to integrate a high-frequency event study into a macro-finance model and structural estimation. The methodology is applied to Federal Reserve announcements in a model where investor beliefs about the economic state and/or regime change in future policy can jump in response to monetary news. We find that stock market volatility in narrow windows around policy announcements is frequently driven by jumps in beliefs about future policy rules that affect subjective risk premia. Such jumps often generate positive comovement between short rates and the stock market, erroneously suggesting a role for “Fed information shocks.”

Suggested Citation

  • Francesco Bianchi & Sydney C. Ludvigson & Sai Ma, 2022. "A Structural Approach to High-Frequency Event Studies: The Fed and Markets as Case History," NBER Working Papers 30072, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:30072
    Note: AP EFG ME
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    Cited by:

    1. Alex Hsu & Indrajit Mitra & Linghang Zeng, 2023. "The Profitability Channel of Monetary Policy Transmission," FRB Atlanta Working Paper 2023-06, Federal Reserve Bank of Atlanta.
    2. Lodge, David & Manu, Ana-Simona & Van Robays, Ine, 2023. "China’s footprint in global financial markets," Working Paper Series 2861, European Central Bank.

    More about this item

    JEL classification:

    • 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
    • E7 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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