The FOMC Risk Shift

Maik Schmeling, Andreas Schrimpf and Tim Kroencke

No 14037, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: A large share of stock returns around FOMC meetings is driven by shocks that are uncorrelated with news about risk-free rates but seem closely related to changes in investors' perception of risk. These "FOMC risk shifts" can only partly be traced to fundamental news. However, FOMC risk shifts are accompanied by sizeable shifts in fund flows reminiscent of "risk on/off" modes and strong price pressure, which accounts for up to half of returns. Our results highlight the role of investor heterogeneity as an important factor to understanding the short-term dynamics of stock returns in response to monetary policy news.

Keywords: Monetary policy surprises; Equity premium; Fund flows; Portfolio rebalancing; Price pressure (search for similar items in EconPapers)
JEL-codes: E44 G10 G12 (search for similar items in EconPapers)
Date: 2019-10
New Economics Papers: this item is included in nep-mac and nep-mon
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Citations: View citations in EconPapers (13)

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Journal Article: The FOMC Risk Shift (2021)
Working Paper: The FOMC risk shift (2021)
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