Research / BFI Working PaperApr 09, 2020

Monetary Momentum

Andreas Neuhierl, Michael Weber

We document a large return drift around monetary policy announcements by the Federal Open Market Committee (FOMC). Stock returns start drifting up 25 days before expansionary monetary policy surprises, whereas they decrease before contractionary surprises. The cumulative return difference across expansionary and contractionary policy decisions amounts to 2.5% until the day of the policy decision and continues to increase to more than 4.5% 15 days after the meeting. The drift is more pronounced during periods of high uncertainty, it is a market-wide phenomenon, and it is present in all industries and many international equity markets. Standard returns factors and time-series momentum do not span the return drift around FOMC policy decisions. A simple trading strategy exploiting the drift around FOMC meetings increases Sharpe ratios relative to a buy-and-hold investment by a factor of 4. The cumulative returns before FOMC meetings significantly predict the subsequent policy surprise.

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