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Stock Returns Over the FOMC Cycle

Last Updated on 10 February, 2024 by Rejaul Karim

In the rhythmic dance of financial markets, Anna Cieslak, Adair Morse, and Annette Vissing-Jorgensen orchestrate an exploration of temporal intricacies in their forthcoming work, “Stock Returns Over the FOMC Cycle.”

Across 57 pages, the trio unveils a captivating revelation: the equity premium, since 1994, unfurls its allure exclusively in weeks zero, two, four, and six within the Federal Open Market Committee (FOMC) cycle. Marching to the pulse of FOMC meetings, the authors intricately link this phenomenon to the Federal Reserve.

Through meticulous analysis of intermeeting target changes, Fed funds futures, and internal Board of Governors meetings, they establish a causal connection between the Fed’s policy shifts and stock market dynamics. The study unravels the rhythmic cadence of monetary influence, shedding light on the systematic communication channels shaping stock returns over the FOMC cycle.

Abstract Of Paper

We document that since 1994, the equity premium is earned entirely in weeks zero, two, four and six in FOMC cycle time, that is, even weeks starting from the last FOMC meeting. We causally tie this fact to the Fed by studying intermeeting target changes, Fed funds futures, and internal Board of Governors meetings. The Fed has affected the stock market via unexpectedly accommodating policy, leading to large reductions in the equity premium. Evidence suggests systematic informal communication of Fed officials with the media and financial sector as a channel through which news about monetary policy has reached the market.

Original paper – Download PDF

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Author

Anna Cieslak
Duke University – Fuqua School of Business; National Bureau of Economic Research (NBER)

Adair Morse
University of California, Berkeley – Haas School of Business; National Bureau of Economic Research (NBER)

Annette Vissing-Jorgensen
Federal Reserve Board; National Bureau of Economic Research (NBER)

Conclusion

In conclusion, the examination of stock returns over the FOMC cycle exposes a distinctive temporal pattern in the equity premium dating back to 1994. The entirety of the equity premium is confined to specific weeks—zero, two, four, and six—within the FOMC cycle, corresponding to even weeks following the last FOMC meeting.

This observed cyclicality is causally linked to the Federal Reserve, supported by analyses of intermeeting target changes, Fed funds futures, and internal Board of Governors meetings. The stock market’s responsiveness to unexpectedly accommodating policy during these weeks underscores the Fed’s role in influencing the equity premium.

Moreover, the findings suggest a mechanism involving systematic informal communication between Fed officials, the media, and the financial sector, providing insights into how information about monetary policy permeates the market.

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Avoiding Momentum Crashes: Dynamic Momentum and Contrarian Trading

FAQ

Q1: What is the main revelation in the paper “Stock Returns Over the FOMC Cycle” by Anna Cieslak, Adair Morse, and Annette Vissing-Jorgensen?

The main revelation of the paper is that, since 1994, the equity premium is earned exclusively in certain weeks within the Federal Open Market Committee (FOMC) cycle—specifically, in weeks zero, two, four, and six, which correspond to even weeks following the last FOMC meeting.

Q2: How is this temporal pattern in stock returns linked to the Federal Reserve, and what evidence supports this connection?

The temporal pattern in stock returns is causally linked to the Federal Reserve. The authors provide evidence by studying intermeeting target changes, Fed funds futures, and internal Board of Governors meetings. The findings suggest that the Federal Reserve’s unexpectedly accommodating policy during these specific weeks influences the equity premium.

Q3: What communication channels are identified in the paper, and how do they contribute to the understanding of stock returns over the FOMC cycle?

The paper suggests a mechanism involving systematic informal communication between Federal Reserve officials, the media, and the financial sector. This mechanism is considered a channel through which news about monetary policy reaches the market, shedding light on how information dissemination contributes to the observed cyclicality in stock returns over the FOMC cycle.

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