Informative Price Pressure

Abstract

Informed investors often hedge their stock bets right before FOMC meetings. The resulting price pressure, when aggregated across stocks, reveals their long-term view of the stock market (with a minus sign). Consistent with this, we find that the average stock market return on the day before recent FOMC meetings, while completely reverted the next day, strongly and negatively predicts stock market returns up to two years in the future. The market return predictability is robust to additional controls, various sample cuts and extends to other important macroeconomic announcements. The day before the FOMC meeting is associated with low informed trading intensity, which explains the decision of informed investors to hedge on that day. At the same time, the VIX index is higher on that day, resulting in detectable price pressure.

Keywords: Price pressure, hedging, informed trading, FOMC meetings