Journal of Financial Economics Vol. 143 No. 1 2022

The cross section of the monetary policy announcement premium

Hengjie Ai^1,2; Leyla Jianyu Han³; Xuhui (Nick) Pan⁴; Lai Xu⁵

¹ University of Wisconsin–Madison · ² University of Minnesota · ³ Boston University · ⁴ University of Oklahoma · ⁵ Syracuse University

Abstract

Using the expected option-implied variance reduction to measure the sensitivity of stock returns to monetary policy announcement surprises, this paper shows monetary policy announcements require significant risk compensation in the cross section of equity returns. We develop a parsimonious equilibrium model in which FOMC announcements reveal the Federal Reserve’s private information about its interest-rate target, which affects the private sector’s expectation about the long-run growth-rate of the economy. Our model accounts for the dynamics of implied variances and the cross section of the monetary policy announcement premium realized around FOMC announcement days.

DOI

10.1016/j.jfineco.2021.07.002

Volume

143

Issue

1

Pages

247-276

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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