The Effects of Federal Funds Target Rate Changes on S&P100 Stock Returns, Volatilities, and Correlations

50 Pages Posted: 27 Nov 2007

See all articles by Helena Chuliá

Helena Chuliá

University of Barcelona - Faculty of Economic Science and Business Studies

Dick J. C. van Dijk

Erasmus University Rotterdam - Erasmus School of Economics - Econometric Institute; ERIM

Martin Martens

Erasmus University Rotterdam (EUR); Robeco Asset Management

Date Written: October 25, 2007

Abstract

We study the impact of FOMC announcements of Federal funds target rate decisions on individual stock prices at the intraday level. We find that the returns, volatilities and correlations of the S&P100 index constituents only respond to the surprise component in the announcement, as measured by the change in the Federal funds futures rate. For example, an unexpected 25 basis points increase of the target rate leads on average to a 113 basis points negative market return within five minutes after the announcement. It also increases market volatility during the 60-minute window around the announcement with 147 basis points. Positive surprises, meaning bad news for stocks, provoke a stronger reaction than negative surprises. Market participants also respond differently to good and bad news. In case of bad news for stocks the fact that there is a surprise matters most, whereas in case of good news the magnitude of the surprise is more important. Across sectors, Financials and IT show the strongest response to target rate surprises.

Keywords: realized volatility, monetary policy announcements, high-frequency data, interest rate surprises

Suggested Citation

Chuliá, Helena and van Dijk, Dick J.C. and Martens, Martin P.E., The Effects of Federal Funds Target Rate Changes on S&P100 Stock Returns, Volatilities, and Correlations (October 25, 2007). ERIM Report Series Reference No. ERS-2007-066-F&A. Available at SSRN: https://ssrn.com/abstract=1032750

Helena Chuliá

University of Barcelona - Faculty of Economic Science and Business Studies ( email )

Barcelona
Spain

Dick J.C. Van Dijk (Contact Author)

Erasmus University Rotterdam - Erasmus School of Economics - Econometric Institute

P.O. Box 1738
3000 DR Rotterdam
Netherlands

ERIM ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 10 408 1263 (Phone)
+31 10 4089162 (Fax)

HOME PAGE: http://people.few.eur.nl/djvandijk

Martin P.E. Martens

Erasmus University Rotterdam (EUR) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 10 408 1253 (Phone)
+31 10 408 9162 (Fax)

Robeco Asset Management ( email )

Rotterdam, 3011 AG
Netherlands

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