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Liquidity and Information Flow around Monetary Policy Announcement

Authors

  • KEE H. CHUNG,

  • JOHN ELDER,

  • JANG-CHUL KIM


  • The paper benefits greatly from the comments and suggestions of two anonymous referees. The authors thank John Cuddington, Yelena Larkin, Jean Lim, Fred Sterbenz, colleagues at SUNY at Buffalo, Colorado State University, and Northern Kentucky University, and session participants at the 2008 FMA conference, the 2010 Midwest Finance Association conference, the 2010 Front Range Seminar, and the 2012 KAFA-KIF Joint Symposium for valuable comments and discussion. Earlier versions of this paper were circulated under the title “Fed Speak: A Market Microstructure Analysis.” The usual disclaimer applies.

Abstract

We analyze the effects of monetary policy announcements on stock market liquidity using intraday data. We show that the impairment in liquidity associated with policy announcements occurs primarily after, rather than before, the announcements, and is relatively short lived, lasting about 1.5 hours. Liquidity impairment varies proportionately with the information content of the policy announcement, with larger effects associated with unscheduled announcements and scheduled announcements with larger policy surprises. Overall, our results suggest that informed traders have an information processing advantage over uninformed participants rather than access to private information.

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