Fed Tails: FOMC Announcements and Stock Market Uncertainty
52 Pages Posted: 14 May 2019 Last revised: 11 Aug 2020
Date Written: April 29, 2019
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: Suggested Citation