Equity Term Structure Response to FOMC Announcements
90 Pages Posted: 29 Apr 2021 Last revised: 21 Apr 2023
Date Written: April 20, 2023
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
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