Fed Implied Market Prices and Risk Premia

Charles Calomiris, Joanna Harris, Harry Mamaysky and Cristina Tessari

No 30210, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We introduce FDIF, a measure of Fed communication surprise based on the text of FOMC statements. FDIF measures the difference between text-implied and actual values of key market variables. Positive FDIF of countercyclical variables (e.g., credit spreads) is associated with negative macroeconomic forecast revisions; the opposite holds for procyclical variables. Industries that hedge bad FDIF news earn low returns on FOMC announcement days, but high returns on non-FOMC days. The opposite holds for FDIF-exposed industries, and the return differences are large. Controlling for FDIF exposure, rate-based policy surprise measures are not priced in the cross-section of industry returns.

JEL-codes: E32 E44 E52 G1 G12 (search for similar items in EconPapers)
Date: 2022-07
New Economics Papers: this item is included in nep-cba and nep-fmk
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