The FOMC Risk Shift
87 Pages Posted: 20 Nov 2017 Last revised: 20 Jan 2021
Date Written: January 19, 2021
We identify a component of monetary policy news that is extracted from high-frequency changes in risky asset prices. These surprises, which we call "risk shifts", are uncorrelated, and therefore complementary, to risk-free rate surprises. We show that (i) risk shifts capture the lion's share of stock price movements around FOMC announcements; (ii) that they are accompanied by significant investor fund flows, suggesting that investors react heterogeneously to monetary policy news; and (iii) that price pressure amplifies the stock market response to monetary policy news. Our results imply that central bank information effects are overshadowed by short-term dynamics stemming from investor rebalancing activities and are likely to be more difficult to identify than previously thought.
Keywords: Monetary policy shocks, Equity Premium, Fund Flows, Portfolio Rebalancing
JEL Classification: G10, G12, E44
Suggested Citation: Suggested Citation