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Relief Rallies after FOMC Announcements as a Resolution of Uncertainty

Last Updated on 10 February, 2024 by Rejaul Karim

Venturing into the intricate landscape of monetary policy dynamics, the research paper “Relief Rallies after FOMC Announcements as a Resolution of Uncertainty” by Chen Gu, Alexander Kurov, and Marketa Wolfe delves into the nuanced relationship between Federal Open Market Committee (FOMC) announcements and stock market responses.

Unveiling a compelling narrative, the study unravels substantial positive average stock returns post-FOMC announcements, particularly when accompanied by the release of the Summary of Economic Projections (SEP) and a press conference by the Fed Chair.

Amidst the complexity, the research highlights that these announcements act as a catalyst for resolution, significantly reducing various measures of market uncertainty. This intricate interplay between communication, uncertainty, and stock returns shapes a captivating exploration of the aftermath of FOMC decisions on financial markets.

Abstract Of Paper

We find substantial positive average stock returns after FOMC announcements accompanied by the release of the Summary of Economic Projections (SEP) and press conference by the Fed Chair. Both SEPs and press conferences contain new information that moves financial markets. We show that several measures of uncertainty are significantly higher on days of FOMC announcements accompanied by SEP and press conference than on announcement days without SEP and press conference. Controlling for changes in uncertainty measured by VIX changes, the positive unconditional mean returns after the FOMC announcements with SEP and press conference disappear. We also find that stocks correlated with market uncertainty shocks have higher returns on days of FOMC meetings with SEP and press conference. These results suggest that the positive post-announcement stock market returns are related to resolution of uncertainty.

Original paper – Download PDF

Here you can download the PDF and original paper of Relief Rallies after FOMC Announcements as a Resolution of Uncertainty.

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Author

Chen Gu
Shanghai Business School – Research Center of Finance

Alexander Kurov
West Virginia University – College of Business & Economics

Marketa Wolfe
Skidmore College – Department of Economics

Conclusion

In summary, this study delves into the intriguing dynamics surrounding FOMC announcements and their impact on financial markets, specifically exploring the phenomenon of relief rallies following the release of the Summary of Economic Projections (SEP) and accompanying press conferences by the Fed Chair.

The findings reveal a noteworthy pattern of substantial positive average stock returns on such occasions, indicative of a resolution of uncertainty in the market. Importantly, measures of uncertainty are significantly higher on days with SEP and press conference, emphasizing the role of these announcements in shaping market dynamics.

When considering changes in broader uncertainty, as measured by VIX changes, the unconditional mean returns lose their positive trend. Additionally, stocks correlated with market uncertainty shocks exhibit higher returns during FOMC meetings with SEP and press conferences, underscoring the intricate relationship between monetary policy communication, stock returns, and the resolution of market uncertainty.

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FAQ

– What does the study reveal about the impact of FOMC announcements, particularly those with a Summary of Economic Projections (SEP) and press conferences, on stock market dynamics?

The study uncovers a notable phenomenon termed “relief rallies” following FOMC announcements with the release of the Summary of Economic Projections (SEP) and accompanying press conferences by the Fed Chair. On such occasions, there is a substantial positive average stock return, suggesting that these announcements play a crucial role in shaping financial market dynamics. This points to the market’s positive response, indicative of a resolution of uncertainty triggered by these specific FOMC communications.

– How do measures of uncertainty vary on days with FOMC announcements, particularly those with SEP and press conferences, according to the study?

The study finds that measures of uncertainty are significantly higher on days with FOMC announcements that include the SEP and press conferences by the Fed Chair. This highlights the role of these specific communication elements in contributing to increased uncertainty in the market. The study delves into the dynamics of how monetary policy communication, especially through these specific announcements, influences and potentially resolves uncertainty in the financial markets.

– What happens to the positive stock returns observed on FOMC announcement days with SEP and press conferences when changes in broader uncertainty, measured by VIX changes, are considered?

When changes in broader uncertainty are accounted for, as measured by VIX changes, the positive unconditional mean returns observed on FOMC announcement days with SEP and press conferences lose their positive trend. This suggests that the positive stock returns are closely linked to changes in overall market uncertainty. Additionally, the study reveals that stocks correlated with market uncertainty shocks have higher returns during FOMC meetings with SEP and press conferences, providing insights into the nuanced relationship between monetary policy communication and the resolution of market uncertainty.

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