The FOMC Risk Shift
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Date
2021-01-27
Author
Kroencke, Tim-Alexander
Schmeling, Maik
Schrimpf, Andreas
SAFE No.
302
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Abstract
We identify a component of monetary policy news that is extracted from high-frequency changes in risky asset prices. These surprises, which we call “risk shifts”, are uncorrelated, and therefore complementary, to risk-free rate surprises. We show that (i) risk shifts capture the lion’s share of stock price movements around FOMC announcements,- (ii) that they are accompanied by significant investor fund flows, suggesting that investors react heterogeneously to monetary policy news,- and (iii) that price pressure amplifies the stock market response to monetary policy news. Our results imply that central bank information effects are overshadowed by short-term dynamics stemming from investor rebalancing activities and are likely to be more difficult to identify than previously thought.
Research Area
Financial Markets
Keywords
monetary policy surprises, equity premium, fund flows, portfolio rebalanc- ing, price pressures
JEL Classification
G10, G12, E44
Research Data
Topic
Consumption
Financial Markets
Saving and Borrowing
Financial Markets
Saving and Borrowing
Relations
1
Publication Type
Working Paper
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- LIF-SAFE Working Papers [334]