Fed Tails: FOMC Announcements and Stock Market Uncertainty

52 Pages Posted: 14 May 2019 Last revised: 11 Aug 2020

See all articles by Heiner Beckmeyer

Heiner Beckmeyer

University of Muenster - Finance Center Muenster

Nicole Branger

University of Muenster - Finance Center Muenster

Thomas Grünthaler

University of Muenster - Finance Center Muenster

Date Written: April 29, 2019

Abstract

Uncertainty around FOMC announcements builds up days ahead of the meeting and fully resolves once the policy decision is announced. Disentangling tail uncertainty shows that the perception of bad economic states is the primary driver of this pattern, albeit policy operations are meant to be stabilizing. Investors are afraid of the revelation of bad states and are willing to pay a hedging premium of approx. 9% per meeting. FOMC announcements are special as uncertainty around other macroeconomic news releases is not driven by tail uncertainty. Not only does tail uncertainty predict pre-announcement stock market returns but also changes in the fed fund target rate for horizons up to one year. Our results indicate that policy makers closely monitor downside uncertainty and use this information as part of their decision-making process.

Keywords: Macroeconomic News Announcements, Monetary Policy Decisions, FOMC, Stock Market Uncertainty, Jump Risks, Volatility Risks, Option-Implied Information, High-Frequency Options Data

JEL Classification: E44, E52, G12, G18

Suggested Citation

Beckmeyer, Heiner and Branger, Nicole and Grünthaler, Thomas, Fed Tails: FOMC Announcements and Stock Market Uncertainty (April 29, 2019). Available at SSRN: https://ssrn.com/abstract= or http://dx.doi.org/10.2139/ssrn.3379561

Heiner Beckmeyer (Contact Author)

University of Muenster - Finance Center Muenster ( email )

Schlossplatz 2
Muenster
Germany

Nicole Branger

University of Muenster - Finance Center Muenster ( email )

Universitatsstr. 14-16
Muenster, 48143
Germany
+49 251 83 29779 (Phone)
+49 251 83 22867 (Fax)

HOME PAGE: http://www.wiwi.uni-muenster.de/fcm/fcm/das-finance-center/details.php?weobjectID=162

Thomas Grünthaler

University of Muenster - Finance Center Muenster ( email )

Universitätsstraße 14-16
Muenster, D-48143
Germany

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