Working Paper: CEPR ID: DP14037
Authors: Maik Schmeling; Andreas Schrimpf; Tim Kroencke
Abstract: A large share of stock returns around FOMC meetings is driven by shocks that are uncorrelated with news about risk-free rates but seem closely related to changes in investors' perception of risk. These "FOMC risk shifts" can only partly be traced to fundamental news. However, FOMC risk shifts are accompanied by sizeable shifts in fund flows reminiscent of "risk on/off" modes and strong price pressure, which accounts for up to half of returns. Our results highlight the role of investor heterogeneity as an important factor to understanding the short-term dynamics of stock returns in response to monetary policy news.
Keywords: Monetary Policy Surprises; Equity Premium; Fund Flows; Portfolio Rebalancing; Price Pressure
JEL Codes: G10; G12; E44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| FOMC risk shifts (E52) | equity returns (G12) |
| FOMC risk shifts (E52) | ETF fund flows (G15) |
| ETF fund flows (G15) | stock returns (G12) |
| FOMC risk shifts (E52) | VIX (C58) |
| FOMC risk shifts (E52) | CDS spreads (G12) |
| FOMC risk shifts (E52) | US dollar (F31) |
| FOMC risk shifts (E52) | stock return reactions (G12) |