FOMC News and Segmented Markets

45 Pages Posted: 19 Jul 2023

See all articles by Benjamin Golez

Benjamin Golez

University of Notre Dame

Peter Kelly

University of Notre Dame

Ben Matthies

University of Notre Dame

Date Written: July 10, 2023

Abstract

A growing body of evidence suggests that FOMC announcements can affect private sector beliefs about near-term macroeconomic conditions. We measure index option trader beliefs about the short-horizon implications of central bank policy using the return of short-term dividend strips around each FOMC announcement (we term this short-term dividend strip return, “SDR”). We find that SDR predicts both future firm-level earnings and firm-level earnings announcement returns. Furthermore, using analyst earnings forecasts, we provide evidence of belief underreaction to FOMC announcements. We develop a stylized framework to show how investor specialization and segmented markets can generate our empirical results.

Keywords: information processing, analysts, Federal Reserve, information effect

JEL Classification: M4, M48, G12, E58

Suggested Citation

Golez, Benjamin and Kelly, Peter and Matthies, Ben, FOMC News and Segmented Markets (July 10, 2023). Available at SSRN: https://ssrn.com/abstract=4506073 or http://dx.doi.org/10.2139/ssrn.4506073

Benjamin Golez

University of Notre Dame ( email )

256 Mendoza College of Business
Notre Dame, IN 46556-5646
United States
(574) 631-1458 (Phone)

HOME PAGE: http://business.nd.edu/BenGolez/

Peter Kelly (Contact Author)

University of Notre Dame ( email )

Ben Matthies

University of Notre Dame ( email )

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