Liquidity and Information Flow Around Monetary Policy Announcements

Chung, Kee H.; Elder, John; Kim, Jang-Chul

doi:10.2139/ssrn.1706172

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Liquidity and Information Flow Around Monetary Policy Announcements

Journal of Money, Credit and Banking, Forthcoming

49 Pages Posted: 9 Nov 2010 Last revised: 7 Aug 2012

See all articles by Kee H. Chung

Kee H. Chung

State University of New York at Buffalo - School of Management

Jang-Chul Kim

Northern Kentucky University - Haile College of Business

Date Written: July 28, 2012

Abstract

We analyze the effects of monetary policy announcements on stock market liquidity using intraday data. We show that the impairment in liquidity associated with policy announcements occurs primarily after, rather than before, the announcements, and is relatively short-lived, lasting about 1.5 hours. Liquidity impairment varies proportionately with the information content of the policy announcement, with larger effects associated with unscheduled announcements, and scheduled announcements with larger policy surprises. Overall, our results suggest that informed traders have an information processing advantage over uninformed participants rather than access to private information.

Keywords: Monetary Policy, Liquidity, Spread, Depth, Event Study, Market Efficiency

JEL Classification: G14, E52

Suggested Citation: Suggested Citation

Chung, Kee H. and Elder, John and Kim, Jang-Chul, Liquidity and Information Flow Around Monetary Policy Announcements (July 28, 2012). Journal of Money, Credit and Banking, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1706172 or http://dx.doi.org/10.2139/ssrn.1706172