Do FOMC minutes matter to markets? An intraday analysis of FOMC minutes releases on individual equity volatility and returns

• Published date: 01 September 2013
• Author: Marc Tomljanovich,Daniel Jubinski
• DOI: http://doi.org/10.1016/j.rfe.2013.01.002
• Date: 01 September 2013

Do FOMC minutes matter to markets? An intraday analysis of FOMC

minutes releases on individual equity volatility and returns

Daniel Jubinski

a,

⁎, Marc Tomljanovich

b,1

a

St. Joseph's University, Department of Finance, MV 340, 5600 City Avenue, Philadelphia, PA 19131, United States

b

Drew University, Department of Economics & Business Studies, 36 Madison Avenue, Madison, NJ 07940, United States

abstractarticle info

Article history:

Received 18 June 2012

Received in revised form 18 November 2012

Accepted 22 January 2013

Available online 31 January 2013

JEL classifications:

E52

G10

C14

Keywords:

Monetary policy

Federal Reserve minutes

Intraday returns

Market efficiency

This paper examines the 2006 to 2007 time period to determine the extent to which the release of the Federal

Reserve minutes affects equity volatility and returns for 2832 individual firms. Using intraday data, we find

that equity returns are essentially unaffected by FOMC minutes releases. We do find evidence of volatility ef-

fects, in that conditional volatility is lower prior to the minutes release and higher after the minutes release

on release days, relative to a “control”day one week prior to the release date. These differences manifest at

the 2:00–2:05 pm interval, and generally dissipate within 15 min. Consistent with previous literature, we

also find evidence of both industry-specific and firm size effects in our data. Finally, we see that volatility

is higher (lower) when the minutes are released after the Federal Reserve engages in restrictive (expansion-

ary) monetary policy. Our results are robust to a variety of different definitions of the “control”dates, as well

as differing industry definitions.

© 2013 Elsevier Inc. All rights reserved.

1. Introduction

This paper examines the extent to which financial market partici-

pants respond to Federal Reserve Open Market Committee minutes

releases. The release of the Federal Open Market Committee minutes

constitutes a pureintraday news event, a relatively rare phenomenon

in U.S. financialmarkets. In contrast to other government news events

(e.g. the weekly jobsreport), which occur outside of tradinghours for

equities, and in contrast to all corporate news events (e.g. earnings

calls),FOMC minutes have beenreleased at 2:00 pm the third week fol-

lowingthe corresponding monetarypolicy meeting since2004. Prior to

December 2004, the minutes for the previous FOMC meeting were

released three days after the decision for the subsequent FOMC

meeting; the lag therefore was sufficiently long that new monetary

policy information had already been received by market participants,

greatly depreciating the economicvalue of the information event.Our

studyanalyzes the 2006 and 2007period in an effort todiscern whether

or not market participants react to the central bank minutes detailing

the macroeconomic conditions inthe United States in a manner above

and beyond the original FOMC statements (and actions, if taken)

themselves.

There are some valid reasons why the FOMC minutes are of poten-

tial interest to financial markets. Additional information about the

current formation of monetary policy could help to clarify expecta-

tions about the future path of interest rates in an economy. This incre-

mental information could be used to generate more accurate forecasts

of other macroeconomic variables (e.g. unemployment and inflation)

as well allow market participants to revise their expectations of fu-

ture asset prices, which could potentially increase the efficacy of

monetary policy. Haldane and Read (2000) argues that the move to-

wards greater central bank transparency causes market participants

to focus on central bank announcements less and macroeconomic

news more. The minutes may also help market agents determine

which macroeconomic indicators are of particular interest to mone-

tary policymakers at a given point in time. The recent decision by

the Federal Reserve to publish forecasts of short-term interest rates,

and the consequent positive response by U.S. equities market to this

policy change, appears to confirm that market participants value

this newly available information as an error reduction mechanism

in their decision-making processes.

It is worth discussing the benefits of the minutes to market partic-

ipants above and beyond the initial FOMC announcements. One hy-

pothesis is that the minutes release contains no new relevant

information, and that the additional details put forth by the Federal

Reserve three weeks after the announcement itself is chiefly for polit-

ical reasons and does not represent an actual increase in transparen-

cy. It is also possible that the minutes do contain new, albeit lagged,

Review of Financial Economics 22 (2013) 86–97

⁎Corresponding author. Tel.: +1 610 660 3449 (office); fax: + 1 610 660 1986.

E-mail addresses: dan.jubinski@sju.edu (D. Jubinski), mtomljan@drew.edu

(M. Tomljanovich).

1

Tel.: +1 973 408 3251 (office).

1058-3300/$ –see front matter © 2013 Elsevier Inc. All rights reserved.

http://dx.doi.org/10.1016/j.rfe.2013.01.002

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Review of Financial Economics

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