Does the FOMC Cycle Affect Credit Risk?
42 Pages Posted: 5 Feb 2020
Date Written: January 13, 2020
This paper studies the returns of credit default swap (CDS) indices over the Federal Open Market Committee (FOMC) cycle from 2005 to 2017. We document that the CDS return is significantly higher in even weeks than in odd weeks of the FOMC cycle. This pattern is linked to the resolution of macroeconomic uncertainty by the biweekly schedules of the Fed Reserve internal Board of Governors meetings. We also provide evidence that the Fed affects the CDS market via unexpected information signal and monetary policy that lead to reductions in the risk premium. Finally, a simple trading strategy based on the biweekly pattern yields an annual return of 8.9%.
Keywords: FOMC, credit default swap, cycle, Fed, monetary policy
JEL Classification: G12, G14
Suggested Citation: Suggested Citation