This website uses cookies.

By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.

« Back to Results

Central Banks and Macro Finance

Paper Session

Friday, Jan. 5, 2018 8:00 AM - 10:00 AM

Loews Philadelphia, Regency Ballroom C2
Hosted By: American Finance Association
  • Chair: Samuel Hanson, Harvard Business School

The FOMC Risk Shift

Tim A. Kroencke
,
University of Basel
Maik Schmeling
,
Cass Business School and CEPR
Andreas Schrimpf
,
Bank for International Settlements and CEPR

Abstract

This paper presents new evidence on channels through which monetary policy affects prices in equity and other asset markets. A large part of U.S. equity price moves around FOMC meetings can be attributed to shocks that are uncorrelated with yield changes but closely linked to changes in investors' risk appetite. These price effects are mirrored by investors' portfolio rebalancing decisions, manifesting themselves via sizeable shifts in fund flows between bonds and equities. All these effects are transitory and largely reversed after about one month. We find evidence that risk appetite shocks are related to changes in uncertainty triggered by FOMC meetings.

Central Bank Communication and the Yield Curve

Matteo Leombroni
,
Stanford University
Andrea Vedolin
,
London School of Economics
Gyuri Venter
,
Copenhagen Business School
Paul Whelan
,
Copenhagen Business School

Abstract

We decompose ECB monetary policy surprises into target and communication shocks and document a number of novel findings. First, consistent with the idea that concurrent implementation of monetary policy is largely anticipated, we find that target shocks only have a limited effect on yields. However, we show that communication shocks have a large and economically significant impact on swap rates and sovereign yields, displaying a hump-shaped pattern across maturity. Second, we document that around the European debt crisis communication had the effect of driving a wedge between yields on core versus peripheral countries. We study two explanations for this finding, revelation of the ECB's private information and credit risk, and argue that neither channel can explain the effect on yield spreads. Motivated by this, we consider an alternative explanation in which central bank communication can induce demand shocks for bonds due to the presence of reaching-for-yield investors. We show that a resulting risk premium channel helps to rationalize our findings.

Monetary Policy Slope and the Stock Market

Andreas Neuhierl
,
University of Notre Dame
Michael Weber
,
University of Chicago

Abstract

We construct a slope factor from changes in federal funds futures of different horizons. A positive slope signals faster monetary policy tightening and predicts negative excess returns at the weekly frequency. Investors can achieve increases in weekly Sharpe ratios of 20% conditioning on the slope factor. The tone of speeches by the FOMC chair correlates with the slope factor. Slope predicts changes in future interest rates and forecast revisions of professional forecasters, but macro news does not drive the predictability of slope for future excess returns. Our findings show that the path of future interest rates matters for asset prices, and monetary policy affects asset prices throughout the year and not only at FOMC meetings.
Discussant(s)
Eric Swanson
,
University of California-Irvine
David Olivier Lucca
,
Federal Reserve Bank of New York
Anna Cieslak
,
Duke University
JEL Classifications
  • G0 - General