The FOMC Risk Shift

Tim Kroencke, Maik Schmeling and Andreas Schrimpf

Journal of Monetary Economics, 2021, vol. 120, issue C, 21-39

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.

JEL-codes: E44 G10 G12 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (8)

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Related works:
Working Paper: The FOMC risk shift (2021)
Working Paper: The FOMC Risk Shift (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:120:y:2021:i:c:p:21-39

DOI: 10.1016/j.jmoneco.2021.02.003

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