Keywords: Uncertainty, information, announcements, expectations GARCH, risk
Abstract: I examine pre-announcement and news effects on the stock market in
the context of public disclosure of monetary policy decisions. The results
suggest that the stock market tends to be relatively quiet--conditional
volatility is abnormally low--on days preceding regularly scheduled policy
announcements. Although this calming effect is routinely reported in
anecdotal press accounts, it is statistically significant only over the
past four to five years, a result that I attribute to changes in the
Federal Reserve's disclosure practices in early 1994. The paper also looks
at how the actual interest rate decisions of policy makers affect stock
market volatility. The element of surprise in such decisions tends to
boost stock market volatility significantly in the short run, and positive
surprises--higher-than-expected values of the target federal funds
rate--tend to have a larger effect on volatility than negative surprises.
The implications of the results for broader issues in the finance
literature are also discussed.
Full paper (131 KB PDF)
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Last update: November 30, 2000