Pre-FOMC Announcement Relief

Orientador(a): Ruy Monteiro Ribeiro

We show that the pre-FOMC announcement drift in equity returns happens mostly in periods of high market uncertainty/volatility. More precisely, this abnormal return is explained by a significant reduction in risk premium prior to the announcement in periods of high market volatility. We also show that the relevant measures of uncertainty/volatility are persistent and are not related to policy uncertainty or policy expectations. Markets do not become stressed in the days prior the announcement and the uncertainty resolution is not reversed in the days after the meeting either. The relation between market uncertainty and pre-FOMC drift in equity returns is robust to different samples and to alternative measure of uncertainty or risk premium.

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