The cross section of the monetary policy announcement premium

Hengjie Ai, Leyla Jianyu Han, Xuhui Nick Pan and Lai Xu

Journal of Financial Economics, 2022, vol. 143, issue 1, 247-276

Abstract: Using the expected option-implied variance reduction to measure the sensitivity of stock returns to monetary policy announcement surprises, this paper shows monetary policy announcements require significant risk compensation in the cross section of equity returns. We develop a parsimonious equilibrium model in which FOMC announcements reveal the Federal Reserve’s private information about its interest-rate target, which affects the private sector’s expectation about the long-run growth-rate of the economy. Our model accounts for the dynamics of implied variances and the cross section of the monetary policy announcement premium realized around FOMC announcement days.

Keywords: FOMC announcement; Implied variance; Cross section; Equity returns (search for similar items in EconPapers)
JEL-codes: D81 E44 G11 G12 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:143:y:2022:i:1:p:247-276

DOI: 10.1016/j.jfineco.2021.07.002

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