How do FED monetary policy announcements impact the U.S. equity market?

• Autor(a) principal: Skaftnes, Joakim
• Data de Publicação: 2023
• Tipo de documento: Dissertação
• Idioma: eng
• Título da fonte: Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)
• Texto Completo: http://hdl.handle.net/10400.14/42569
• topic: Monetary policy announcements; Federal Funds Futures; U.S. stock market; Domínio/Área Científica::Ciências Sociais::Economia e Gestão

The present Dissertation explores the impact of monetary policy announcements on U.S. equity markets, thereby critically analysing its magnitude and persistence. The time window ranges from 2001 until 2023, and the sample analyses the days with Federal Open Market Committee (FOMC) meetings, and the corresponding dates where changes in the Federal Funds target rate are being announced. The Dissertation implements the seminal methodology of Kuttner (2001) to decompose the changes in monetary policy into expected and unexpected components using historical Fed Funds future rates data. The main finding of the Dissertation is a strong relation between monetary policy and equity markets. The returns of the Dow Jones Industrial Average and NASDAQ-100 are negative upon positive surprises in the target rate. Overall, the findings are consistent with the Efficient Market Hypothesis, as the expected changes in the target rate are incorporated in equity prices in advance to its announcement. Through the inclusion of dummy variables, the Dissertation does not find evidence of different market reactions to target rate surprises in recessions, nor in reversal meetings. The Dissertation also finds a longer lasting impact of target rate changes, observed through the implied and realized volatility of the indices. Greater than expected increases in the target rate are associated with increases in both volatility measures. The spread between them is on average positive, leading to the existence of a positive volatility risk premium. Subsequently, the Dissertation employs two robustness checks, affirming the robustness and stability of the findings presented herein.