Explaining the Pre-Announcement Drift
59 Pages Posted: 8 Aug 2017 Last revised: 19 Dec 2018
Date Written: December 18, 2018
I propose a theoretical explanation for the puzzling positive pre-announcement drift that has been empirically documented to occur before scheduled announcements, using as main example the drift before the Federal Open Market Committee (FOMC) meetings. I construct a general equilibrium model of disagreement (difference-of-opinion) where two groups of agents react differently to the information released at the announcement and also to signals regarding this information available between two announcement dates. The model matches consistently key empirical facts such as (1) the upward drift in prices just before the announcement, (2) lower risk (price volatility) before the announcement, followed by higher risk after the announcement, and (3) low (high) trading volume before (after) the announcement.
Keywords: FOMC announcements, differences-of-opinion, scheduled announcements, sentiment risk, optimal stopping time
JEL Classification: E52, G12
Suggested Citation: Suggested Citation