The Cross Section of Monetary Policy Announcement Premium
Journal of Financial Economics (forthcoming)
88 Pages Posted: 1 Mar 2019 Last revised: 15 Mar 2021
Date Written: February 3, 2021
Using the expected option-implied variance reduction to measure the sensitivity of stock returns to monetary policy announcement surprises, this paper shows that monetary policy announcements require significant risk compensation in the cross section of equity returns. We present evidence that our sensitivity measure captures the exposure of stock returns with respect to growth rate expectations. We develop a parsimonious equilibrium model in which FOMC announcements reveal the Federal Reserve's interest rate target, which affects the expected growth rate of the economy. Our model accounts for the dynamics of implied variances and the cross section of the monetary policy announcement premium realized around FOMC announcement days.
Keywords: FOMC Announcement, Implied Variance, Cross Section, Equity Returns
JEL Classification: D81, G12, E44
Suggested Citation: Suggested Citation