The disappearing pre-FOMC announcement drift

Abstract

Highlights Lucca and Moench (2015) document large average excess returns in U.S. equities before scheduled Federal Open Market Committee (FOMC) meetings from September 1994 to March 2011, leading to a puzzle not explained by standard asset pricing theory. We extend the sample to December 2019. We find that after first appearing before FOMC announcements accompanied by the Fed Chair press conferences, the pre-FOMC drift essentially disappeared after 2015 in both announcements accompanied by press conferences and announcements not accompanied by press conferences. We discuss a possible explanation for this change: reduced uncertainty.

Pre-Refunding Announcement Gains in U.S. Treasurys

“…There are roughly eight FOMC announcements per year, with roughly half of them having a proximate TRA since 2002. We find that since 2002, the pre-FOMC announcement drift is strong and robust when the FOMC meeting occurs within a week of a TRA, even as the pre-FOMC announcement drift has been disappearing in recent years (Kurov et al, 2021). However, the pre-FOMC drift is much weaker and reverses on the day after the announcement when there is no proximate TRA.…”

“…Kurov et al (2021) find that the FOMC drift in equity markets has been declining, and is essentially non-existent after 2015. They attribute this to reduced uncertainty in the more recent time period.…”

Risk and Returns Around FOMC Press Conferences: A Novel Perspective from Computer Vision

“…This alone makes these events an important object of interest for researchers. Together with Beckmeyer, Grunthaler, and Branger (2019) and Kurov, Wolfe, and Gilbert (2020), all of the above mentioned papers revolve around studying the build-up and resolution of uncertainty around macroeconomic announcements. My addition with respect to this literature is to identify why some press conferences reduce more uncertainty than others.…”