Institutional Trading around FOMC Meetings: Evidence of Fed Leaks

50 Pages Posted: 20 Apr 2021 Last revised: 12 Jul 2021

See all articles by Nicola Mano

Nicola Mano

Universita della Svizzera italiana (USI Lugano); Swiss Finance Institute

Date Written: April 20, 2021

Abstract

Fed leaks to the financial sector are actively exploited by institutional investors to trade ahead of the Federal Open Market Committee (FOMC) meetings. Using detailed transaction records from Ancerno, I find evidence consistent with informed institutional trading on the stock market on the days before the FOMC scheduled announcements. The institutional trading imbalance on highly exposed stocks is in the same direction of the subsequent monetary policy surprise. The magnitude of this result is economically significant. I find that trades in anticipation of FOMC meetings are particularly strong before easing monetary policy shocks - when the aggregate market reaction is positive -, for the most-active traders, and for the hedge funds that are headquartered close to one of the regional reserve banks. Fed informal communication with the financial sector seems to be driven by the non-voting members of the Federal Open Market Committee. These findings contribute to an information-based explanation of the pre-FOMC drift and, from a policy perspective, suggest that any benefits of Fed unofficial communication must be balanced against the risk of giving some investors an unfair advantage.

Keywords: Institutional investors, FOMC, Monetary Policy, Federal Reserve, Communication

JEL Classification: E52, G23, G14, E44

Suggested Citation

Mano, Nicola, Institutional Trading around FOMC Meetings: Evidence of Fed Leaks (April 20, 2021). Available at SSRN: https://ssrn.com/abstract=3830271 or http://dx.doi.org/10.2139/ssrn.3830271

Nicola Mano (Contact Author)

Universita della Svizzera italiana (USI Lugano) ( email )

Via Buffi 13
Lugano, 6900
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
47
Abstract Views
309
PlumX Metrics