Central Bank Actions and Words: The Intraday Effects of FOMC Policy Communications on Individual Equity Volatility and Returns

• Author: Marc Tomljanovich,Daniel Jubinski
• Published date: 01 November 2017
• DOI: http://doi.org/10.1111/fire.12143
• Date: 01 November 2017

The Financial Review 52 (2017) 701–724

Central Bank Actions and Words: The

Intraday Effects of FOMC Policy

Communications on Individual Equity

Volatility and Returns

Daniel Jubinski∗

Saint Joseph’s University

Marc Tomljanovich

Drew University

Abstract

We compare intraday impacts of the release of Federal Reserve decision announcements

and of Federal Open Market Committee minutes between 2004 and 2015 on 1,997 equity

return and volatility series. We find that returns are unresponsive to either news release,

but conditional volatility increases for both, manifesting immediately after each information

release, and persisting for 30 minutes post-announcement. These effects are largerfor decisions

than for minutes. On stratifying firms by trading intensity,we find most “high trading intensity”

firms respond to these announcements, while “low trading intensity” firms are less affected.

Our results show that traders respond, albeit differently,to both s ets of information releases.

Keywords: monetary policy, Federal Reserve announcements, intraday returns, market effi-

ciency, central bank communication

JEL Classifications: E52, G10, C14

∗Corresponding author: Assistant Professor of Finance, St. Joseph’s University, Department of Finance,

MV 340, 5600 City Avenue, Philadelphia, PA 19131; Phone: (610) 660-3449; Fax: (610) 660-1986;

E-mail: dan.jubinski@sju.edu.

We would like to thank Jason Fink in contributingto the idea of this paper, as well as Craig Holden and

Stacey Jacobsen for providing the SAS code to analyze the Daily TAQ data. We also wish to thank Saint

Joseph’s Universityfor providing the Daily TAQ data analyzed in this study.

C2017 The Eastern Finance Association 701

702 D. Jubinski and M. Tomljanovich/The Financial Review 52 (2017) 701–724

1. Introduction

The release of Federal Reserve monetary policy information is of profound

importance to financial market participants, as this communication can reveal how

monetary policy authorities perceive the current state and the expected future course

of the United States and world economies. The information contained in monetary

policy announcements and releases can also help agents better understand the under-

lying factors that enter the central bank’s decision-making process, which may allow

financial market participants to take positions that would allow them to profit from

such information.

There are only two regularly scheduled news releases by the U.S. Federal Re-

serve that occur during normal trading hours for U.S. equities. The first is a briefly

worded statement disseminated at the end of each Federal Open Market Committee

(FOMC) meeting. This decision announcement indicates what particular monetary

policy action the FOMC will undertake in a particular meeting. The second news

item is the document containing the minutes for a FOMC meeting, with the minute

releases occurring three weeks after the associated FOMC meeting.1These minutes

are much more detailed than the statement that accompanies the actual FOMC de-

cision, and are a potentially rich source of information about both the current state

and the expected future health of the domestic and global economies. Since January

2005, the minute releases occur three weeks after a particular FOMC meeting, and

approximately three weeks prior to the next regularly scheduled FOMC policy meet-

ing. Given the potential information present in the minutes, it is a natural question

whether market participants find additional value in the release of the delayed but

expanded information contained in the minutes, relative to the immediate, but tersely

conveyed information in the FOMC decision announcements. We study the extent to

which U.S. equities are affected by these two monetary policy information releases,

and analyze whether these two information releases have comparable marketimpacts.

The FOMC statements and minutes are unique in that they are perhaps the

only two examples of information releases that consistently occur during the normal

trading hours of U.S. financial markets. The timing of the release of these statements

is well-known, as FOMC decision statements now occur at 2:00 p.m. Eastern time,2

whereas the minutes are also released to the public at 2:00 p.m. Eastern time. Financial

market participants are advised of these information events well in advance, as a

calendar with release dates and times is posted on the Federal Reserve Board of

1For example, the minutes for the September 17, 2014 FOMC meeting were released on October 8, 2014.

2From 2005 to 2011, FOMC decision announcements occurred at 2:15 p.m. From April 2011 through

January 2013, four FOMC decisions each year occurred at 12:30 p.m. to allow for a 2:15 p.m. public press

conference by the Chairman of the U.S. Federal Reserve which included live Q&A. The remaining four

decisions were released at 2:15 p.m. during this time period. Since March 2013, all FOMC announcements

have been at 2:00 p.m., with a press conference four times a year starting at 2:30 p.m. These schedule

revisions and any alternate schedules were conveyed beforehand to market participants. The FOMC

minutes have been released at 2:00 p.m. throughout the entirety of our sample.