Fed Tails: FOMC Announcements and Stock Market Uncertainty

Abstract

Uncertainty and monetary policy decisions in the U.S. interact with one another. Contrary to the common notion that FOMC announcements resolve a non-trivial amount of economic uncertainty, we find that the announcement commands a sizable left-tail premium, which builds up a few days in advance. The dominant role of left-tail uncertainty is unique to FOMC announcements, the behavior varies over time, significantly predicts future rate decisions, and is confirmed through frequent discussions by FOMC members. We attribute the left-tail uncertainty premium to supply shocks in the market for crash insurance.

JEL Classification: E44,E52,G12,G18