The FOMC Risk Shift
95 Pages Posted: 20 Nov 2017 Last revised: 14 Sep 2019
Date Written: September 12, 2019
A large share of stock returns around FOMC meetings is driven by shocks that are uncorrelated with news about risk-free rates but seem closely related to changes in investors' perception of risk. These "FOMC risk shifts" can only partly be traced to fundamental news. However, "FOMC risk shifts" are accompanied by sizeable shifts in fund flows reminiscent of "risk on/off" modes and strong price pressure, which accounts for up to half of returns. Our results highlight the role of investor heterogeneity as an important factor to understanding the short-term dynamics of stock returns in response to monetary policy news.
Keywords: Monetary policy shocks, Equity Premium, Fund Flows, Portfolio Rebalancing
JEL Classification: G10, G12, E44
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