The FOMC risk shift

Tim Kroencke, Maik Schmeling and Andreas Schrimpf

No 302, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

Abstract: We identify a component of monetary policy news that is extracted from high-frequency changes in risky asset prices. These surprises, which we call "risk shifts", are uncorrelated, and therefore complementary, to risk-free rate surprises. We show that (i) risk shifts capture the lion's share of stock price movements around FOMC announcements; (ii) that they are accompanied by significant investor fund flows, suggesting that investors react heterogeneously to monetary policy news; and (iii) that price pressure amplifies the stock market response to monetary policy news. Our results imply that central bank information effects are overshadowed by short-term dynamics stemming from investor rebalancing activities and are likely to be more difficult to identify than previously thought.

Keywords: Monetary Policy Surprises; Equity Premium; Fund Flows; Portfolio Rebalancing; Price Pressures (search for similar items in EconPapers)
JEL-codes: E44 G10 G12 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Related works:
Journal Article: The FOMC Risk Shift (2021)
Working Paper: The FOMC Risk Shift (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:302

DOI: 10.2139/ssrn.3774275

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