Volume Dynamics around FOMC Announcements

Abstract

The stock market volume decreases in anticipation of FOMC announcements and increases afterward. Using firm-level high-frequency price and volume data for over 20 years, I find, in the cross-section, that volume changes around FOMC announcements are particularly stronger for stocks with higher market risk exposure, higher market liquidity, and larger market capitalization. I develop a stylized model and attribute the volume dynamics to discretionary liquidity trading resulting from the presence of private information. Consistent with the model's prediction, I find that information asymmetry increases ahead of FOMC announcements, but only for high-beta stocks. However, the presence of private information ahead of FOMC announcements overall does not introduce substantial liquidity shocks to the stock market.

Keywords: macroeconomic news, trading volume, liquidity, information asymmetry

JEL Classification: D18, G12, G14