The FOMC Risk Shift

95 Pages Posted: 20 Nov 2017 Last revised: 14 Sep 2019

See all articles by Tim Alexander Kroencke

Tim Alexander Kroencke

University of Neuchatel - Institute of Financial Analysis

Maik Schmeling

Goethe University Frankfurt - Department of Finance; Centre for Economic Policy Research (CEPR)

Andreas Schrimpf

Bank for International Settlements (BIS) - Monetary and Economic Department

Date Written: September 12, 2019

Abstract

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

Suggested Citation

Kroencke, Tim Alexander and Schmeling, Maik and Schrimpf, Andreas, The FOMC Risk Shift (September 12, 2019). Available at SSRN: https://ssrn.com/abstract=3072912 or http://dx.doi.org/10.2139/ssrn.3072912

Tim Alexander Kroencke (Contact Author)

University of Neuchatel - Institute of Financial Analysis ( email )

Pierre-a-Mazel,7
Neuchatel, CH-2000
Switzerland

Maik Schmeling

Goethe University Frankfurt - Department of Finance ( email )

House of Finance
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, Hessen 60323
Germany

HOME PAGE: http://sites.google.com/site/maikschmeling/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Andreas Schrimpf

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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