One Central Bank to Rule Them All

Brusa, Francesca; Savor, Pavel G.; Wilson, Mungo Ivor

doi:10.2139/ssrn.2658953

Cited by 30 publications

(35 citation statements)

References 26 publications

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“…Our empirical results are related to the previous research on stock market returns on macroeconomic announcement days. This literature documents that stock market returns and Sharpe ratios are significantly higher on days with macroeconomic news releases in the United States (Savor and Wilson (2013)) and internationally (Brusa, Savor, and Wilson (2015)). Lucca and Moench (2015) found similar patterns and documented a pre-FOMC announcement drift.…”

Section: Related Literaturementioning

confidence: 99%

Risk Preferences and the Macroeconomic Announcement Premium

Ai¹,

Bansal²

2018

Econometrica

181

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This paper develops a revealed preference theory for the equity premium around macroeconomic announcements. Stock returns realized around pre‐scheduled macroeconomic announcements, such as the employment report and the FOMC statements, account for 55% of the market equity premium. We provide a characterization theorem for the set of intertemporal preferences that generates a nonnegative announcement premium. Our theory establishes that the announcement premium identifies a significant deviation from time‐separable expected utility and provides asset‐market‐based evidence for a large class of non‐expected utility models. We also provide conditions under which asset prices may rise prior to some macroeconomic announcements and exhibit a pre‐announcement drift.

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Section: Related Literaturementioning

confidence: 99%

Risk Preferences and the Macroeconomic Announcement Premium

Ai¹,

Bansal²

2018

Econometrica

181

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“…For example, Canada only started a fixed announcement schedule from 2001 onwards, Norway only met once per year until 2007, etc. 17 In contrast, Brusa, Savor, and Wilson (2015) document that except for the Fed, there is no announcement effect on global stock market indices from other central banks and that the Fed exerts an unique impact on global equity prices. 18 See Kuttner (2014) for an excellent overview of Japan's monetary policy.…”

Section: Announcements By Other Central Banksmentioning

confidence: 99%

Exchange Rates and Monetary Policy Uncertainty

Mueller¹,

Tahbaz-Salehi

Vedolin

2015

SSRN Journal

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We document that a trading strategy that is short the U.S. dollar and long other currencies exhibits significantly larger excess returns on days with scheduled Federal Open Market Committee (FOMC) announcements. We also show that these excess returns (i) are higher for currencies with higher interest rate differentials vis-à-vis the U.S.; (ii) All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means without the prior permission in writing of the publisher nor be issued to the public or circulated in any form other than that in which it is published.Requests for permission to reproduce any article or part of the Working Paper should be sent to the editor at the above address. AbstractWe document that a trading strategy that is short the U.S. dollar and long other currencies exhibits significantly larger excess returns on days with scheduled Federal Open Market Committee (FOMC) announcements. We also show that these excess returns (i) are higher for currencies with higher interest rate differentials vis-à-vis the U.S.; (ii) increase with uncertainty about monetary policy; and (iii) intensify when the Federal Reserve adopts a policy of monetary easing. We interpret these excess returns as a compensation for monetary policy uncertainty within a parsimonious model of constrained financiers who intermediate global demand for currencies.

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“…It may also be true, however, that USD Libor expectations simply serve as a stronger proxy for omitted macro variables, which in turn are linked causally to EUR and GBP Libor expectations. Distinguishing between these explanations is beyond the scope of this paper, though the evidence of Brusa, Savor, and Wilson (2016) seems to imply the former explanation holds water.…”

Section: Granger Causality Across Ratesmentioning

confidence: 79%

“…There are a couple potential explanations for the relatively great importance of USD Libor rate expectations to those for EUR and GBP Libor. It is certainly possible that USD-denominated interest rates hold greater causal sway relative to alternative interest rates; for example, Brusa, Savor, and Wilson (2016) find that Federal Reserve policy decision announcements bear an outsized influence across global stock market risk premia, which is not true for any other central bank they examine. It may also be true, however, that USD Libor expectations simply serve as a stronger proxy for omitted macro variables, which in turn are linked causally to EUR and GBP Libor expectations.…”

Section: Granger Causality Across Ratesmentioning

confidence: 97%

Option-Implied Libor Rate Expectations across Currencies

Gebbia

2016

internationalfinance

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In this paper, I study risk-neutral probability densities regarding future Libor rates denominated in British pounds, euros, and US dollars as implied by option prices. I apply Breeden and Litzenberger's (1978) result regarding the relationship between option prices and implied probabilities for the underlying to estimate full probability density functions for future Libor rates. I use these estimates in case studies, detailing the evolution of probabalistic expectations for future Libor rates over the course of several important market events. Next, I compute distributional moments from density functions estimated for fixed horizons and test for Granger causality across the three Libor rate distributions considering their mean, standard deviation, skewness, and kurtosis. I further break these relationships down by various fixed horizon lengths, as well as the slope and curvature in the term structure of moments over different horizons. The results show a rich interconnectedness among these three Libor rates that extends well beyond levels of future mean expectations. JEL Classifications: C14, E43, G13

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One Central Bank to Rule Them All

Cited by 30 publications

References 26 publications

Risk Preferences and the Macroeconomic Announcement Premium

Risk Preferences and the Macroeconomic Announcement Premium

Exchange Rates and Monetary Policy Uncertainty

Option-Implied Libor Rate Expectations across Currencies

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