The Pre-FOMC Announcement Drift

Authors

  • DAVID O. LUCCA,

  • EMANUEL MOENCH

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    • Both authors are affiliated with the Federal Reserve Bank of New York. We thank our discussants Annette Vissing-Jorgensen, Ken Kuttner, Pavel Savor, Jonathan Brogaard, Marcel Priebsch, and Chris Parsons as well as Tobias Adrian, Yakov Amihud, Nina Boyarchenko, John Cochrane, Richard Crump, Itamar Drechsler, Fernando Duarte, Darrell Duffie, Thomas Eisenbach, Michael Fleming, David Hirshleifer, Charles Jones, Ralph Koijen, Arvind Krishnamurthy, Thomas Mertens, Ľuboš Pástor, Simon Potter, Asani Sarkar, Ernst Schaumburg, Pietro Veronesi, and Jonathan Wright and seminar participants at Harvard Business School, New York Fed, NYU Stern Finance, Deutsche Bundesbank, Banque de France, the Swiss National Bank, NBER Asset Pricing Meeting, NBER Monetary Economics Meeting, Boston University/Fed Conference on Macro-Finance Linkages, CIRANO, ESMT Berlin, Red Rock Finance Conference, Penn State Smeal College, Goldman Sachs, Western Finance Association and European Finance Association for useful comments. Kirby Fears, Steve Kang, Weiling Liu, and Jonas Mishara-Blomberger provided valuable research assistance. The views expressed in the paper are those of the authors and do not necessarily reflect views at the Federal Reserve Bank of New York or the Federal Reserve System.


ABSTRACT

We document large average excess returns on U.S. equities in anticipation of monetary policy decisions made at scheduled meetings of the Federal Open Market Committee (FOMC) in the past few decades. These pre-FOMC returns have increased over time and account for sizable fractions of total annual realized stock returns. While other major international equity indices experienced similar pre-FOMC returns, we find no such effect in U.S. Treasury securities and money market futures. Other major U.S. macroeconomic news announcements also do not give rise to preannouncement excess equity returns. We discuss challenges in explaining these returns with standard asset pricing theory.

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