The Curious Case of the Pre-FOMC Drift
14 Pages Posted: 12 Aug 2015 Last revised: 12 Feb 2018
Date Written: August 6, 2015
The pre-FOMC drift was first published in 2011 and is a strong driver of equity market performance over the last 30 years. The effect is able to explain approximately half of all the equity market returns over the measured period. We verify the results of prior studies. Furthermore, the report dives into conditional factors; equity market trend and monetary policy action to see if there is any difference in terms of macro variables. We find that FOMC is rather stable throughout time, macro conditions and has not been dependent on a particular Fed Chair.
It seems as if the markets are expecting that the FOCM will infuse optimism into equity markets as the majority of the gains occurs before the actual announcement. The effect can be due to behavioral issues and herding among market participants but can also be due to information leakage. The effect remains unexplained.
Keywords: Behavioral Finance, FOMC, FED Meeting, Event Trading, Pre-FOMC Drift, US Federal Reserve, Monetary Policy
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