Noisy FOMC Returns

Abstract

FOMC announcements cause substantial trade volume in equity markets. Is such volume mirroring information flow? Using a new diagnostic to quantify information flow net of noise, we show equity prices following FOMC announcements are less informative about future indicative prices than those before announcements, suggesting that announcement returns essentially reflect noise. The necessary reversal of the noise is obscured by our finding that price informativeness remains low for about two weeks. Our findings have important implications for existing studies of equity returns around FOMC announcements: they cannot be interpreted as an efficient market transitioning to a new macroeconomic equilibrium.

Keywords: FOMC announcements, noise, price informativeness, price pressure

JEL Classification: E50, G12, G14