58 Pages Posted: 5 Sep 2017 Last revised: 21 Jun 2018
Date Written: June 13, 2018
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. Standard returns factors and time-series momemtum do not span the return drift around FOMC policy decisions. The return drift is a market-wide phenomenon and holds for all industries and many international equity markets. 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.
Keywords: Return Drift, Policy Speeches, Expected Returns, Macro News
JEL Classification: E31, E43, E44, E52, E58, G12
Suggested Citation: Suggested Citation