Monetary Policy Slope and the Stock Market
85 Pages Posted: 10 Nov 2016 Last revised: 20 Jan 2018
Date Written: January 19, 2018
We construct a slope factor from changes in federal funds futures of different horizons. A positive slope signals faster monetary policy tightening and predicts negative excess returns at the weekly frequency. Investors can achieve increases in weekly Sharpe ratios of 20% conditioning on the slope factor. The tone of speeches by the FOMC chair correlates with the slope factor. Slope predicts changes in future interest rates and forecast revisions of professional forecasters, but macro news does not drive the predictability of slope for future excess returns. Our findings are consistent with a delayed market reactions due to investor inattention.
Keywords: Return Predictability, Policy Speeches, Expected Returns, Macro News
JEL Classification: E31, E43, E44, E52, E58, G12
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