Research / BFI Working PaperApr 09, 2020

Monetary Momentum

Andreas Neuhierl, Michael Weber

We document a large return drift around monetary policy announcements by the Federal Open Market Committee (FOMC). Stock returns start drifting up 25 days before expansionary monetary policy surprises, whereas they decrease before contractionary surprises. The cumulative return difference across expansionary and contractionary policy decisions amounts to 2.5% until the day of the policy decision and continues to increase to more than 4.5% 15 days after the meeting. The drift is more pronounced during periods of high uncertainty, it is a market-wide phenomenon, and it is present in all industries and many international equity markets. Standard returns factors and time-series momentum do not span the return drift around FOMC policy decisions. A simple trading strategy exploiting the drift around FOMC meetings increases Sharpe ratios relative to a buy-and-hold investment by a factor of 4. The cumulative returns before FOMC meetings significantly predict the subsequent policy surprise.

More Research From These Scholars

BFI Working Paper Aug 9, 2021

Diverse Policy Committees Can Reach Underrepresented Groups

Francesco D'Acunto, Andreas Fuster, Michael Weber
Topics:  Monetary Policy
BFI Working Paper Aug 3, 2018

Price Rigidity and the Origins of Aggregate Fluctuations

Ernesto Pasten, Raphael Schoenle, Michael Weber
Topics:  Fiscal Studies, Monetary Policy
BFI Working Paper Sep 10, 2019

IQ, Expectations, and Choice

Francesco D'Acunto, Daniel Hoang, Maritta Paloviita, Michael Weber
Topics:  K-12 Education, Monetary Policy, Financial Markets, Higher Education & Workforce Training