FOMC Forward Guidance and Investor Beliefs

Arunima Sinha

American Economic Review, 2015, vol. 105, issue 5, 656-61

Abstract: This paper considers the effect of different dimensions of the FOMC's forward guidance on ex ante investor expectations about future changes in US Treasury yields. Options and Futures data for 2- and 10-year Treasuries is used to extract State-Price Densities of investor beliefs, and the corresponding standard deviation, skewness, and excess kurtosis of these densities are computed. Announcements about extension of the zero-lower bound in 2012-13 are found to reduce the expectations about crash risk, but increase the uncertainty about future yields for the 10-year. Policies about long-security purchases lead investors to place greater weight on no change in future yields.

JEL-codes: D14 D83 E43 E52 E58 (search for similar items in EconPapers)
Date: 2015
Note: DOI: 10.1257/aer.p20151123
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Citations: View citations in EconPapers (7)

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