For Whom Do "Fed Information Shocks" Matter and Why?

Abstract

We demonstrate that while Federal Reserve decisions may not introduce new information for professional forecasters and rational investors, they act as "information shocks" for a significant segment of the market. Our findings suggest that overconfident equity investors who rely on the Fed's economic assessments hesitate to trade in the absence of positive signals from the Fed. Stocks sensitive to this hesitation show increased trading volume, higher liquidity, and elevated abnormal returns during a short window after the FOMC meeting. Notably, these effects are primarily driven by retail investors rather than institutional investors, becoming more pronounced after the 2008 financial crisis, but diminishing when market scrutiny intensifies.

Keywords: Fed information shocks, Category learning, stock liquidity, Trading volume, Retail investors, Abnormal returns.