Does the FOMC Cycle Affect Credit Risk?
Financial Management, forthcoming
45 Pages Posted: 5 Feb 2020 Last revised: 12 May 2021
Date Written: January 13, 2020
This paper studies the returns of CDS indices over the Federal Open Market Committee (FOMC) cycle. We document that the CDS return is significantly higher in even weeks than in odd weeks of the FOMC cycle. The biweekly pattern in the CDS market is not a mere reflection of that in the stock market. A simple trading strategy based on the biweekly pattern yields an annual excess return of 8.8%. This pattern is linked to the resolution of macroeconomic uncertainty by the biweekly schedules of the Fed Reserve internal Board of Governors meetings. We provide further evidence that the Fed affects the CDS market via unexpected information signals and monetary policies that lead to reductions in the risk premium.
Keywords: FOMC, credit default swap, cycle, Fed, monetary policy
JEL Classification: G12, G14
Suggested Citation: Suggested Citation