The FOMC Risk Shift

98 Pages Posted: 7 Oct 2019

See all articles by Tim Alexander Kroencke

Tim Alexander Kroencke

FHNW School of Business

Maik Schmeling

Goethe University Frankfurt - Department of Finance; Centre for Economic Policy Research (CEPR)

Andreas Schrimpf

Bank for International Settlements (BIS) - Monetary and Economic Department; Centre for Economic Policy Research (CEPR); University of Tuebingen

Multiple version iconThere are 3 versions of this paper

Date Written: October 2019

Abstract

A large share of stock returns around FOMC meetings is driven by shocks that are uncorrelated with news about risk-free rates but seem closely related to changes in investors' perception of risk. These "FOMC risk shifts" can only partly be traced to fundamental news. However, FOMC risk shifts are accompanied by sizeable shifts in fund flows reminiscent of "risk on/off" modes and strong price pressure, which accounts for up to half of returns. Our results highlight the role of investor heterogeneity as an important factor to understanding the short-term dynamics of stock returns in response to monetary policy news.

Keywords: Equity premium, Fund flows, Monetary Policy Surprises, Portfolio rebalancing, Price pressure

JEL Classification: E44, G10, G12

Suggested Citation

Kroencke, Tim Alexander and Schmeling, Maik and Schrimpf, Andreas, The FOMC Risk Shift (October 2019). CEPR Discussion Paper No. DP14037, Available at SSRN: https://ssrn.com/abstract=3465749

Tim Alexander Kroencke (Contact Author)

FHNW School of Business ( email )

Peter Merian-Strasse 86
Basel, 4002
Switzerland

Maik Schmeling

Goethe University Frankfurt - Department of Finance ( email )

House of Finance
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, Hessen 60323
Germany

HOME PAGE: http://sites.google.com/site/maikschmeling/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Andreas Schrimpf

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

University of Tuebingen ( email )

Wilhelmstr. 19
72074 Tuebingen, Baden Wuerttemberg 72074
Germany

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