The Cross Section of Monetary Policy Announcement Premium

Journal of Financial Economics (forthcoming)

88 Pages Posted: 1 Mar 2019 Last revised: 15 Mar 2021

See all articles by Hengjie Ai

Hengjie Ai

University of Minnesota - Twin Cities - Carlson School of Management

Leyla Jianyu Han

Boston University - Questrom School of Business

Xuhui (Nick) Pan

University of Oklahoma

Lai Xu

Syracuse University

Date Written: February 3, 2021

Abstract

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

Ai, Hengjie and Han, Leyla Jianyu and Pan, Xuhui (Nick) and Xu, Lai, The Cross Section of Monetary Policy Announcement Premium (February 3, 2021). Journal of Financial Economics (forthcoming), Available at SSRN: https://ssrn.com/abstract=3338889 or http://dx.doi.org/10.2139/ssrn.3338889

Hengjie Ai (Contact Author)

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

Leyla Jianyu Han

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States

HOME PAGE: http://leylahan.weebly.com/

Xuhui (Nick) Pan

University of Oklahoma ( email )

307 W Brooks
Norman, OK 73019
United States

Lai Xu

Syracuse University ( email )

900 S. Crouse Avenue
Syracuse, NY 13244-2130
United States

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