Pre-FOMC Information Asymmetry

51 Pages Posted: 19 Nov 2018 Last revised: 30 Nov 2021

See all articles by Farshid Abdi

Farshid Abdi

University of Massachusetts Amherst

Botao Wu

New York University (NYU) - Leonard N. Stern School of Business

Date Written: August 2018

Abstract

We uncover informed trading on the days before federal open market committee (FOMC) announcements. We show that this informed trading can explain the pre-FOMC announcement drift in the stock market, by contributing to the resolution of uncertainty before announcement. We document three distinct novel evidences supporting this. First, we show that U.S. corporate bond yield changes in the blackout period before FOMC announcements can predict monetary policy surprises, with about 30% R-squared. Second, and consistent with informed trading, we show that corporate bond customers tend to buy before upcoming expansionary FOMC surprises and sell before contractionary FOMC surprises. Finally, we uncover pre-FOMC information flow from corporate bond to the stock market by showing that (a) corporate bond yield changes Granger-cause stock market pre-FOMC movements, and (b) lagged corporate bond customer-dealer trade imbalances can explain pre-FOMC stock market returns, and the pre-announcement drift.

Keywords: Pre-FOMC Announcement Drift, Informed Trading, Resolution of Uncertainty, TRACE

JEL Classification: G10, G12, E44, E52

Suggested Citation

Abdi, Farshid and Wu, Botao, Pre-FOMC Information Asymmetry (August 2018). NYU Stern School of Business, Available at SSRN: https://ssrn.com/abstract=3286135 or http://dx.doi.org/10.2139/ssrn.3286135

Farshid Abdi (Contact Author)

University of Massachusetts Amherst ( email )

121 Presidents Drive
Amherst, MA 01003-4910
United States

HOME PAGE: http://farshidabdi.net/

Botao Wu

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 W 4th Street
Suite 9-160
New York, NY 10012
United States

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