FOMC Announcements and Predictable Returns
42 Pages Posted: 16 Dec 2014 Last revised: 11 Sep 2017
Date Written: September 10, 2017
I document that the high market returns and good performance of the CAPM associated with FOMC meetings are concentrated on meetings with unanticipated cuts to the Fed funds target rate. Moreover, stocks that perform poorly around meetings with surprise cuts subsequently outperform the market. This behavior generates robust predictability in the cross-section of stock returns. Stocks whose returns have positive covariances with surprise changes to interest rates carry a premium in their future returns. These covariances, however, are transient, indicating short-lived interest rate exposure for individual firms.
Keywords: Asset Pricing, Macroeconomics, Anomalies, Monetary Policy, Predictability
JEL Classification: G11, G12, E52
Suggested Citation: Suggested Citation