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.

More Research From These Scholars

BFI Working Paper Dec 14, 2020

Cybersecurity Risk

Chris Florakis, Christodoulos Louca, Roni Michaely, Michael Weber
Topics:  Technology & Innovation
BFI Working Paper Mar 17, 2022

What Do the Data Tell Us About Inflation Expectations?

Francesco D'Acunto, Ulrike Malmendier, Michael Weber
Topics:  Monetary Policy
BFI Working Paper Jan 12, 2022

Inclusive Monetary Policy: How Tight Labor Markets Facilitate Broad-Based Employment Growth

Nittai K. Bergman, David Matsa, Michael Weber
Topics:  Monetary Policy