Does the FOMC Cycle Affect Credit Risk?

42 Pages Posted: 5 Feb 2020

See all articles by Difang Huang

Difang Huang

Monash University

Yubin Li

Harbin Institute of Technology, Shenzhen

Xinjie Wang

Southern University of Science and Technology

Zhaodong Zhong

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Date Written: January 13, 2020

Abstract

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

Huang, Difang and Li, Yubin and Wang, Xinjie and Zhong, Zhaodong, Does the FOMC Cycle Affect Credit Risk? (January 13, 2020). Available at SSRN: https://ssrn.com/abstract=3512662 or http://dx.doi.org/10.2139/ssrn.3512662

Difang Huang

Monash University ( email )

900 DANDENONG ROAD
Melbourne, Victoria 3145
Australia

Yubin Li

Harbin Institute of Technology, Shenzhen ( email )

University Town
Nanshan District
Shenzhen, Guangdong 518055
China

Xinjie Wang (Contact Author)

Southern University of Science and Technology ( email )

1088 Xueyuan Blvd
Xili, Nanshan District
Shenzhen, Guangdong 518055
China

Zhaodong Zhong

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

Department of Finance, Rutgers Business School
100 Rockafeller Road
Piscataway, NJ 08854
United States

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