The FOMC Announcement Reversal

38 Pages Posted: 17 Aug 2022

See all articles by Tommaso Baglioni

Tommaso Baglioni

Insper

Ruy Ribeiro

Insper; Santander Bank - Santander Asset Management

Date Written: August 7, 2022

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.

Suggested Citation

Baglioni, Tommaso and Ribeiro, Ruy, The FOMC Announcement Reversal (August 7, 2022). Available at SSRN: https://ssrn.com/abstract=4182628 or http://dx.doi.org/10.2139/ssrn.4182628

Tommaso Baglioni (Contact Author)

Insper ( email )

Rua Quatá 300 - Vila Olímpia
Sao Paulo, 04546-042
Brazil

Ruy Ribeiro

Insper ( email )

R Quata 300
Sao Paulo, 04542-030
Brazil

Santander Bank - Santander Asset Management ( email )

Av. Juscelino Kubitschek, 2041
São Paulo 04543-011
Brazil

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