The cross section of the monetary policy announcement premium

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

Research output: Contribution to journalArticlepeer-review

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 languageEnglish (US)
Pages (from-to)247-276
Number of pages30
JournalJournal of Financial Economics
Volume143
Issue number1
DOIs
StatePublished - Jan 2022
Externally publishedYes

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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