Monetary Momentum

46 Pages Posted: 5 Sep 2017 Last revised: 10 Apr 2020

See all articles by Andreas Neuhierl

Andreas Neuhierl

University of Notre Dame - Department of Finance

Michael Weber

University of Chicago - Finance

Multiple version iconThere are 3 versions of this paper

Date Written: April 1, 2020

Abstract

We document a large return drift around monetary policy announcements by the Federal Open Market Committee (FOMC). Stock returns start drifting up 25 days before expansionary monetary policy surprises, whereas they decrease before contractionary surprises. The cumulative return difference across expansionary and contractionary policy decisions amounts to 2.5% until the day of the policy decision and continues to increase to more than 4.5% 15 days after the meeting. The drift is more pronounced during periods of high uncertainty, it is a market-wide phenomenon, and it is present in all industries and many international equity markets. Standard returns factors and time-series momentum do not span the return drift around FOMC policy decisions. A simple trading strategy exploiting the drift around FOMC meetings increases Sharpe ratios relative to a buy-and-hold investment by a factor of 4. The cumulative returns before FOMC meetings significantly predict the subsequent policy surprise.

Keywords: Return Drift, Monetary Policy, FOMC, Macro News

JEL Classification: E31, E43, E44, E52, E58, G12

Suggested Citation

Neuhierl, Andreas and Weber, Michael, Monetary Momentum (April 1, 2020). Chicago Booth Research Paper No. 20-05; Fama-Miller Working Paper; University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2020-39. Available at SSRN: https://ssrn.com/abstract=3030126 or http://dx.doi.org/10.2139/ssrn.3030126

Andreas Neuhierl

University of Notre Dame - Department of Finance ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States

Michael Weber (Contact Author)

University of Chicago - Finance ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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