The Fed Call: FOMC Announcement and Stock Market Uncertainty
45 Pages Posted: 14 May 2019 Last revised: 20 May 2019
Date Written: April 29, 2019
We empirically study the behavior of stock market uncertainty around U.S. monetary policy decisions using high-frequency option quotes. We find that FOMC announcements trigger sudden and large movements in uncertainty, with highly significant drops for different price levels and horizons of up to one year. Uncertainty in the tails builds up remarkably before the announcements. While the increase is largely resolved for left tail uncertainty (bad economic states) after the Fed announces its decision, the elevation persists for right tail uncertainty (good economic states). This is especially true when considering announcements in which the committee cut the short-rate, surprising monetary policy decisions were taken, a press conference was held, or the primary information conveyed concerned the economic outlook. We coin this effect of FOMC announcements the "Fed Call".
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: Suggested Citation