The FOMC Announcement Reversal

Abstract

This paper documents a negative relationship between pre-FOMC announcement returns and post-FOMC announcement returns, independent of the state of the economy and sample period. We propose and test a reversal strategy consisting in buying (selling) E-Mini S&P 500 just before the announcement, if the pre-FOMC announcement return is negative (positive), and closing the position at the end of the trading day. Over the period 1997 – 2020, considering 180 scheduled FOMC announcements, this strategy generates Sharpe ratios more than 2.5 times greater than the pre-FOMC announcement drift puzzle of Lucca and Moench (2015). Moreover, the Sharpe ratio of the reversal strategy increased since 2011, while the pre-FOMC announcement drift disappeared.

Keywords: FOMC Announcements, Pre-FOMC Announcement Drift, Post-FOMC Announcement Return, Reversal.

JEL Classification: G12, G14.