Global asset prices and FOMC announcements

Journal of Banking & Finance, 2008

This paper shows that exchange rates respond to only the surprise component of an actual US monetary policy change and that failure to disentangle the surprise component from the actual monetary policy change can lead to an underestimation of the impact of monetary policy, or even to a false acceptance of the hypothesis that monetary policy has no impact on exchange rates. This finding implies that there is a need for reexamining the empirical analyses of asset price responses to macro news that do not isolate the unexpected component of news from the expected element. In addition, we add to the debate on how quickly exchange rates respond to news by showing that the exchange rates under study absorb monetary policy surprises within the same day as the news are announced.

SSRN Electronic Journal, 2000

We document how the impact of monetary surprises in the euro area and the US on financial markets has changed since 1999. We use a definition of monetary policy surprises that singles out movements in the long end of the yield curve, rather than those that change nearby futures on the central bank reference rates. By focusing only on this component of monetary policy our results are more comparable over time. We find a hump-shaped response of the yield curve to monetary policy surprises, both in the pre-crisis period and since 2013. During the crisis years, Fed path-surprises, largely through their effect on term premia, account for the impact on interest rates, which is found to be increasing in tenor. In the euro area, the path-surprises reflect shifts in sovereign spreads and have a large impact on the entire constellation of interest rates, exchange rates and equity markets.

This study estimates the impacts of conventional and unconventional monetary policy surprises on asset markets in the United States using the heteroskedasticity-based GMM technique suggested by Rigobon and Sack (2004). Monetary policy surprises have statistically significant effects on major asset markets in both periods, yet magnitudes of responses differ notably in the unconventional period. For the unconventional period, the impacts of monetary policy surprises on stock returns and the implied volatilities in stock and bond markets are found to be lower compared to the conventional period. For most of the other asset returns however, responses are similar or higher in the unconventional period.

SSRN Electronic Journal

High-frequency changes in interest rates around FOMC announcements are an important tool for identifying the effects of monetary policy on asset prices and the macroeconomy. However, some recent studies have questioned both the exogeneity and the relevance of these monetary policy surprises as instruments, especially for estimating the macroeconomic effects of monetary policy shocks. For example, monetary policy surprises are correlated with macroeconomic and financial data that is publicly available prior to the FOMC announcement. We address these concerns in two ways: First, we expand the set of monetary policy announcements to include speeches by the Fed Chair, which essentially doubles the number and importance of announcements in our dataset. Second, we explain the predictability of the monetary policy surprises in terms of the "Fed response to news" channel of Bauer and Swanson ( ) and account for it by orthogonalizing the surprises with respect to macroeconomic and financial data. Our subsequent reassessment of the effects of monetary policy yields two key results: First, estimates of the high-frequency effects on financial markets are largely unchanged. Second, estimates of the macroeconomic effects of monetary policy are substantially larger and more significant than what most previous empirical studies have found.

Journal of International Money and Finance, 2010

We examine the impact and possible spillovers effects of unanticipated monetary policy on international bond returns. First, we decompose international bond returns into news regarding future returns, real interest rates and future inflation in the spirit of for Germany, the UK and the US. We next assess how excess bond returns in these three countries are affected by surprise changes in monetary policy in each country. Our measure of the unanticipated element of monetary policy is based on futures markets rather than the more traditional vector autoregression. Our results indicate that excess bond returns primarily react to domestic as compared to foreign monetary policy surprises. We also find there is a strong divergence between the effects of domestic monetary on excess bond returns in Germany relative to the UK with a surprise monetary tightening in former(latter) leading to a rise(fall) in the excess holding period return and this appears to be driven by news regarding lower(higher) inflation expectations and could be potentially rationalised by differences in the credibility of the monetary policy authority in each country.

International Journal of Monetary Economics and Finance

This paper empirically investigates the impact of US monetary policy surprises on the volatility of stock market returns for euro area countries. More specifically, to extract the unanticipated component of the US monetary policy, we follow the Kuttner's methodology and we use the federal funds futures. Using the approach of dynamic conditional correlation (DCC) as introduced by Engle (2002) over the period from 1 January, 2004 through 31 December, 2008, we find that US monetary policy surprises exert a strong influence on market volatility. This confirms the efficient markets hypothesis demonstrating that equity prices should only react to new information. We also find a significant response of volatility to an expected component of target rate change. We highlight homogeneity in the responsiveness of European stock markets to US news announcements. It is important to note that the persistence of volatility is clear across all regressions and it is shown by the strong significance of associated coefficients.

Review of Middle East Economics and Finance, 2008

This paper assesses the response of a set of emerging markets' domestic interest rates to the US monetary policy surprises within a dynamic framework. Monthly data from Algeria, Bahrain, Israel, Jordan, Kuwait, Tunisia and Turkey for the 1989:03 to 2005:12 period reveal positive effects of the unanticipated Federal Funds target changes on the short-term interest rates of these countries. When we look at the effect of US monetary policy surprises for different Turkish interest rates, the evidence is robust for the 3 and 12-month rates, but government controlled interbank and treasury auction rates have reverse positions.

Central banks unexpectedly tightening policy rates often observe the exchange value of their currency depreciate, rather than appreciate as predicted by standard models. We document this for Fed and ECB policy days using event studies and ask whether an information effect, where the public attributes the policy surprise to an unobserved state of the economy, may explain the abnormality. It turns out that many informational assumptions make a standard twocountry New Keynesian model match this behavior. To identify the particular mechanism, we condition on multiple asset prices in the event study and model implications for these. We find that there is heterogeneity in this dimension in the event study and no model with a single regime can match the evidence. Further, even after conditioning on possible information effects driving longer term interest rates, there appear to be other drivers of exchange rates. Our results show that existing models have a long way to go in reconciling event study analysis with model-based mechanisms of asset pricing.

1998

This paper examines how Treasury security yields, stock prices, and federal funds futures rates respond on Federal Open Market Committee (FOMC) meeting dates when expected policy actions do not occur. The empirical results support the existence of nonannouncement effects on short-and intermediateterm yields. In particular, part of an expected policy action, measured using federal funds futures rates, is unwound when the action does not materialize. This partial unwinding is consistent with markets reacting to the surprise by postponing, but not eliminating, the possibility of a future policy action. We also find that only the response of near-term federal funds futures rates is larger after February 1994, when the Federal Reserve began making virtually all of its nonzero changes in the federal funds rate target at FOMC meetings. As a whole, our results suggest that monetary policy decisions can be informative to financial markets even when these decisions do not involve an overt policy action, and they support the view that market expectations of future policy actions are an important determinant of the behavior of interest rates.

Economics Letters, 2010

We examine the effects of U.S. federal funds target rate changes and all types of FOMC communication on European and Pacific equity market returns using a GARCH model. We