Words that shake traders
Journal of Empirical Finance, 2011, vol. 18, issue 5, 915-934
This paper investigates the effects of Federal Reserve's decisions and statements on U.S. stock and volatility indices (Dow Jones Industrial Average, NASDAQ 100, S&P 500, and VIX) using a high-frequency event-study analysis. I find that both the surprise component of policy actions and official communication have statistically significant and economically relevant effects on equity indices, with statements having a much greater explanatory power of the reaction of stock prices to monetary policy. For instance, around 90% of the explainable variation in S&P 500 is due to the surprise component of Fed's statements. This paper also shows that equity indices tend to incorporate FOMC monetary surprises within 40min from the announcement release. Finally, I find that these results are robust along several dimensions. In particular, I consider different estimators, such as the Generalized Empirical Likelihood, and I extend the sample to include the recent period of heightened financial stress. This sensitivity analysis corroborates that central bank communication about its future policy intentions is a key driver of stock returns.
Keywords: U.S. Federal Reserve; Central bank communication; Monetary policy and news shocks; High-frequency data; Stock market; Generalized Empirical Likelihood (search for similar items in EconPapers)
JEL-codes: C14 E52 E58 F31 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:18:y:2011:i:5:p:915-934
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Journal of Empirical Finance is currently edited by R. T. Baillie, F. C. Palm, Th. J. Vermaelen and C. C. P. Wolff
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