The cross section of the monetary policy announcement premium

Hengjie Ai; Leyla Jianyu Han; Xuhui Nick Pan; Lai Xu

doi:10.1016/j.jfineco.2021.07.002

The cross section of the monetary policy announcement premium

Hengjie Ai, Leyla Jianyu Han, Xuhui Nick Pan, Lai Xu

Whitman School of Management

Research output: Contribution to journal › Article › peer-review

11 Scopus citations

Abstract

Using the expected option-implied variance reduction to measure the sensitivity of stock returns to monetary policy announcement surprises, this paper shows monetary policy announcements require significant risk compensation in the cross section of equity returns. We develop a parsimonious equilibrium model in which FOMC announcements reveal the Federal Reserve's private information about its interest-rate target, which affects the private sector's expectation about the long-run growth-rate of the economy. Our model accounts for the dynamics of implied variances and the cross section of the monetary policy announcement premium realized around FOMC announcement days.

Original language	English (US)
Pages (from-to)	247-276
Number of pages	30
Journal	Journal of Financial Economics
Volume	143
Issue number	1
DOIs	https://doi.org/10.1016/j.jfineco.2021.07.002
State	Published - Jan 2022

Keywords

Cross section
Equity returns
FOMC announcement
Implied variance

ASJC Scopus subject areas

Accounting
Finance
Economics and Econometrics
Strategy and Management

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10.1016/j.jfineco.2021.07.002

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title = "The cross section of the monetary policy announcement premium",

abstract = "Using the expected option-implied variance reduction to measure the sensitivity of stock returns to monetary policy announcement surprises, this paper shows monetary policy announcements require significant risk compensation in the cross section of equity returns. We develop a parsimonious equilibrium model in which FOMC announcements reveal the Federal Reserve's private information about its interest-rate target, which affects the private sector's expectation about the long-run growth-rate of the economy. Our model accounts for the dynamics of implied variances and the cross section of the monetary policy announcement premium realized around FOMC announcement days.",

keywords = "Cross section, Equity returns, FOMC announcement, Implied variance",

author = "Hengjie Ai and Han, {Leyla Jianyu} and Pan, {Xuhui Nick} and Lai Xu",

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AU - Ai, Hengjie

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AU - Xu, Lai

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N2 - Using the expected option-implied variance reduction to measure the sensitivity of stock returns to monetary policy announcement surprises, this paper shows monetary policy announcements require significant risk compensation in the cross section of equity returns. We develop a parsimonious equilibrium model in which FOMC announcements reveal the Federal Reserve's private information about its interest-rate target, which affects the private sector's expectation about the long-run growth-rate of the economy. Our model accounts for the dynamics of implied variances and the cross section of the monetary policy announcement premium realized around FOMC announcement days.

AB - Using the expected option-implied variance reduction to measure the sensitivity of stock returns to monetary policy announcement surprises, this paper shows monetary policy announcements require significant risk compensation in the cross section of equity returns. We develop a parsimonious equilibrium model in which FOMC announcements reveal the Federal Reserve's private information about its interest-rate target, which affects the private sector's expectation about the long-run growth-rate of the economy. Our model accounts for the dynamics of implied variances and the cross section of the monetary policy announcement premium realized around FOMC announcement days.

KW - Cross section

KW - Equity returns

KW - FOMC announcement

KW - Implied variance

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The cross section of the monetary policy announcement premium

Abstract

Keywords

ASJC Scopus subject areas

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