Fed Tails: FOMC Announcements and Stock Market Uncertainty
67 Pages Posted: 14 May 2019 Last revised: 30 Mar 2023
Date Written: April 29, 2019
Abstract
Uncertainty and monetary policy decisions in the U.S. interact with one another. Contrary to the common notion that FOMC announcements resolve a non-trivial amount of economic uncertainty, we find that the announcement commands a sizable left-tail premium, which builds up a few days in advance. The dominant role of left-tail uncertainty is unique to FOMC announcements, the behavior varies over time, significantly predicts future rate decisions, and is confirmed through frequent discussions by FOMC members. We attribute the left-tail uncertainty premium to supply shocks in the market for crash insurance.
Keywords: Macroeconomic News Announcements, Monetary Policy Decisions, FOMC, Stock Market Uncertainty, Jump Risks, Volatility Risks, Option-Implied Information, High-Frequency Options Data
JEL Classification: E44, E52, G12, G18
Suggested Citation: Suggested Citation