Working Paper: NBER ID: w24748
Authors: Andreas Neuhierl; Michael Weber
Abstract: We document a large return drift around monetary policy announcements by the Federal Open Market Committee (FOMC). Stock returns start drifting up 25 days before expansionary monetary policy surprises, whereas they decrease before contractionary surprises. The cumulative return difference across expansionary and contractionary policy decisions amounts to 2.5% until the day of the policy decision and continues to increase to more than 4.5% 15 days after the meeting. Standard returns factors and time-series momentum do not span the return drift around FOMC policy decisions. The return drift is a market-wide phenomenon and holds for all industries and many international equity markets. A simple trading strategy exploiting the drift around FOMC meetings increases Sharpe ratios relative to a buy-and-hold investment by a factor of 4.
Keywords: monetary policy; stock returns; FOMC; momentum
JEL Codes: E31; E43; E44; E52; E58; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| expansionary monetary policy surprises (E60) | stock returns (G12) |
| contractionary monetary policy surprises (E52) | stock returns (G12) |
| stock returns increase (G12) | trading strategy based on drift enhances Sharpe ratios (G40) |
| cumulative return differences (G11) | stock returns (G12) |
| standard return factors and time-series momentum (C22) | stock returns (G12) |