The FOMC risk shift
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Author (Corporation)
Publication date
2021
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01A - Journal article
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Parent work
Journal of Monetary Economics
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DOI of the original publication
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Volume
120
Issue / Number
Pages / Duration
21-39
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Publisher / Publishing institution
Elsevier
Place of publication / Event location
Amsterdam
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Abstract
We identify a component of monetary policy news that is extracted from high-frequency changes in risky asset prices. These surprises, which we call “risk shifts”, are uncorrelated, and therefore complementary, to risk-free rate surprises. We show that (i) risk shifts capture the lion’s share of stock price movements around FOMC announcements; (ii) that they are accompanied by significant investor fund flows, suggesting that investors react heterogeneously to monetary policy news; and (iii) that price pressure amplifies the stock market response to monetary policy news. Our results imply that central bank information effects are overshadowed by short-term dynamics stemming from investor rebalancing activities and are likely to be more difficult to identify than previously thought.
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ISBN
ISSN
0304-3932
1873-1295
1873-1295
Language
English
Created during FHNW affiliation
No
Strategic action fields FHNW
Publication status
Published
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Peer review of the complete publication
Open access category
Closed
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Citation
Kröncke, T., Schmeling, M., & Schrimpf, A. (2021). The FOMC risk shift. Journal of Monetary Economics, 120, 21–39. https://doi.org/10.2139/ssrn.3072912