Download This PaperDisagreement and Scheduled Announcements: Explaining the Pre-Announcement Drift *
60 Pages Posted: 8 Aug 2017 Last revised: 19 May 2025
Date Written: December 18, 2018
Abstract
This paper proposes a theoretical explanation for the positive pre-announcement drift empirically documented ahead of scheduled announcements, using the drift preceding Federal Open Market Committee (FOMC) meetings as a main example. The framework entails a general equilibrium model of disagreement (differences of opinion), where investors interpret a costly signal differently. Investors optimally decide to stop learning from the costly signal when an announcement is imminent, increasing the risk premium ahead of an announcement. The model jointly rationalizes puzzling empirical evidence by generating (1) an upward drift in prices just before a scheduled announcement, regardless of the announcement's content, which coexists with (2) low volatility and (3) low trading volume.
Keywords: FOMC announcements, differences of opinion, scheduled announcements, sentiment risk, optimal learning
JEL Classification: E52, G12
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