The Greenspan Effect on Equity Markets: An Intraday Examination of U.S. Monetary Policy Announcements

36 Pages Posted: 26 Oct 2005

See all articles by Eric Bentzen

Eric Bentzen

Copenhagen Business School

Peter Reinhard Hansen

University of North Carolina (UNC) at Chapel Hill - Department of Economics; Copenhagen Business School, Finance; Aarhus University - CREATES

Asger Lunde

Aarhus University - School of Economics and Management; CREATES

Allan A. Zebedee

Clarkson University

Date Written: October 2005

Abstract

In this paper, we provide an intraday analysis of the impact of monetary policy on the equity markets. Specifically, we study changes in prices and changes in volatility for the S&P 500 associated with Federal Open Market Committee announcements as well as real-time changes in market expectations about future policy. The analysis shows an economically and statistically significant inverse relationship between equity market returns and changes in the Fed funds rate target. The magnitude of the response is dependent on whether the change was expected or unexpected. An expected change in the Fed funds rate target of 25 basis points results in approximately a 30 basis point decline in the broad equity market, while an unexpected change of 25 basis points in the Fed funds rate target results in approximately 125 basis point decline in the broad equity market. The speed of these market reactions is rapid with the equity market reaching a new equilibrium within fifteen minutes. In contrast to these results, the analysis also shows a positive relationship exists between equity market returns and changes in expectations about future monetary policy. Taken together, these results regarding price changes (returns) suggest that the price discovery process in the equity markets is dominated by the realization of expectations and not market expectations per se. Meanwhile, the volatility analysis suggests a volatility spike follows both FOMC announcements and real-time changes in expectations, but the duration of these spikes is relatively short-lived and dampens out within one hour.

Keywords: Monetary Policy, Exchange Traded Funds, Realized Variance, High-Frequency Data

JEL Classification: C22, G11, G12

Suggested Citation

Bentzen, Eric and Hansen, Peter Reinhard and Lunde, Asger and Zebedee, Allan A., The Greenspan Effect on Equity Markets: An Intraday Examination of U.S. Monetary Policy Announcements (October 2005). Available at SSRN: https://ssrn.com/abstract=826744 or http://dx.doi.org/10.2139/ssrn.826744

Eric Bentzen

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

Peter Reinhard Hansen

University of North Carolina (UNC) at Chapel Hill - Department of Economics ( email )

Chapel Hill, NC 27599
United States

HOME PAGE: http://https://sites.google.com/site/peterreinhardhansen/

Copenhagen Business School, Finance ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

Aarhus University - CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Asger Lunde

Aarhus University - School of Economics and Management ( email )

Aarhus
Denmark

CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Allan A. Zebedee (Contact Author)

Clarkson University ( email )

Potsdam, NY 13699-5780
United States
315.268.3890 (Phone)

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