The cross section of the monetary policy announcement premium

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© 2022 Elsevier Inc. This version of the article is distributed under a Creative Commons Attribution – NonCommercial – NoDerivs (CC BY-NC-ND) license.
Date Issued
2022-01
Publisher Version
10.1016/j.jfineco.2021.07.002
Author(s)
Ai, Hengjie
Han, Leyla Jianyu
Pan, Xuhui Nick
Xu, Lai
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https://hdl.handle.net/2144/43625
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Accepted manuscript
Citation (published version)
H. Ai, L.J. Han, X.N. Pan, L. Xu. 2022. "The cross section of the monetary policy announcement premium." Journal of Financial Economics, Volume 143, Issue 1, pp. 247 - 276. https://doi.org/10.1016/j.jfineco.2021.07.002
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.
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© 2022 Elsevier Inc. This version of the article is distributed under a Creative Commons Attribution – NonCommercial – NoDerivs (CC BY-NC-ND) license.
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