Equity Term Structure Response to FOMC Announcements

Abstract

We study the response of the equity term structure to FOMC announcements using a high-frequency event study approach. We find that monetary policy surprises have opposite effects on short-term dividend strips and the long-term equity market. Following an unanticipated cut in the target rate, short-term dividend strip prices decrease while long-term equity prices increase on average. Furthermore, the short-term dividend strip return in the 30-minute window around each FOMC announcement positively predicts macroeconomic growth up to one-year ahead. We present a stylized framework which shows this pattern can arise when policy decisions signal information about current economic conditions.

Keywords: term structure, asset pricing, dividend strips, fed information

JEL Classification: E50, G10