Recovering the FOMC risk premium

• 成果类型: Article
• 署名作者: Liu, Hong; Tang, Xiaoxiao; Zhou, Guofu
• 署名单位: Washington University (WUSTL); University of Texas System; University of Texas Dallas
• 刊物名称: JOURNAL OF FINANCIAL ECONOMICS
• ISSN/ISSBN: 0304-405X
• DOI: 10.1016/j.jfineco.2022.04.005
• 发表日期: 2022
• 页码: 45-68
• 关键词: options; FOMC meeting; Risk premium; drift; RECOVERY

摘要

The Federal Open Market Committee (FOMC) meetings are among the most important economic events. We propose a novel method to recover the FOMC risk premium and drift sizes. Empirically, we find that for the 192 meetings from 1996 to 2019, the FOMC risk premium varies across meetings, from 1 to 326 basis points (bps) with an average of 45 bps. We obtain an out-of-sample R 2 of 7.51% when using the recovered FOMC premium to predict the meeting returns around the announcement. The average predicted upward drift size is 101 bps, and the average predicted downward drift size is 129 bps, matching well with the realized ones. (c) 2022 Elsevier B.V. All rights reserved.