i n s i g h t s
2012
I 11
24
ä
While the European Central Bank and the Bank of
Japan play an important role on the markets, it’s
clearly the US Federal Reserve that’s calling the shots.
And that also shows that any announcement made on
future-interest-rate policy or on the introduction-or
continuation of unconventional measures such as,
for example, a loose monetary policy also known as
quantitativeeasing,will regularly lead to fluctuations in
global financial markets. The Open Market Committee
of the US Federal Reserve, FOMC for short, usually
meets eight times a year on specified dates, releasing
an official announcement after each meeting at 2.15
pm local time (8.15 pm CET). The authors of the paper
The Pre-FOMC Announcement Drift“ have studied
the performance of the stock market during all 131
FOMC meetings for the period of September 1994 to
March 2011. To determine the extent to which market
participants operate with a sense of anticipation, the
observations of the two authors always refer to the
24-
hour period prior to the FOMC announcement
itself, i.e. to the period from 2 pm (of the day before) to
2
pm of the day of the release of that announcement.
Prices Soar Prior to FOMC Decision
In many ways, the researchers have come up with
surprising results. For example, the S&P 500 saw
above-average returns in the run-up to the FOMC
decision being made public. The typical pattern of
the US leading index is as follows: On the day before
the interest-rate decision, the index rises slightly in the
afternoon and goes up significantly on the morning
of the day the report is published. Shortly before the
release of the FOMC report, the S&P 500 was quoted
at an average of 49 basis points (equivalent to 0.49 per
cent) above the opening level of the previous day.
And what happens after the interest-rate decision
is made public at 2.15 pm local time? The S&P 500 will
be more or less unchanged in the following hours nor
will there be a lot of activity on the day after, the results
of the study have shown. From a risk perspective it can
be seen that – contrary to the expectations of many
observers – the risk was no higher on FOMC days than
on “normal“ trading days. In both cases, the standard
deviation of excess returns was 1.2 per cent.
To recap: During the 24 hours prior to the FOMC
decision, the annualised excess return of the S&P 500
was around 3.9 per cent as opposed to only 0.9 per
cent during the rest of the trading days.
All Eyes On the Fed
Given the dominance of the US Federal Reserve, it
would be interesting to know whether the central-
bank effect described above can also be observed
internationally. Valuable information on this is
provided by the study which examined the stock-
market indices DAX, FTSE 100, CAC 40, IBEX, SMI, the
Nikkei and the Canadian TSX: It turned out that, with
the exception of the Japanese Nikkei, the interest-rate
anomaly described above is a global phenomenon
(
see Figure 1). Especially in the case of the European
indices, there was – during the period investigated
a statistical price effect that was similar to the US
market and can be considered significant at values of
between 29 and 53 basis points (equalling 0.29 to 0.53
per cent). Another finding of the study conducted by
Messrs Lucca andMoench is that central banks outside
the United States failed to trigger any noticeable price
movements in the domestic stock indices. Simply put,
only the Fed’s decisions cause a stir while those taken
by the other central banks do not.
Lucca and Moench go on to show that even major
U.S. macroeconomic data have no significant impact
on the US stock market. To arrive at this conclusion,
a total of nine important macroeconomic data series
such as industrial production, jobless claims, housing
starts, and so onwere analysed in terms of their impact
on the S&P 500 before and after the date of their
release. The SMI index was the only one to show high
F1)
Cumulative Returns Before and After FOMC Meetings
Since 1994, the S&P 500 has shown high excess
returns in the 24-hour period prior to the publication
of the FOMC report. The phenomenon can also be
documented on the basis of the performance of
other indices.
Source: The Pre-FOMC Announcement Drift,
David O Lucca and Emanuel Moench, Federal Reserve Bank of
New York Staff Reports, No 512, June 2012