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

Published date01 November 2017
Date01 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
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.
C2017 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.

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT