The Effects of Federal Funds Target Rate Changes on S&P100 Stock Returns, Volatilities, and Correlations

Helena Chuliá, Martin Martens and Dick van Dijk

ERIM Report Series Research in Management from Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam

Abstract: We study the impact of FOMC announcements of Federal funds target rate decisions on individual stock prices at the intraday level. We find that the returns, volatilities and correlations of the S&P100 index constituents only respond to the surprise component in the announcement, as measured by the change in the Federal funds futures rate. For example, an unexpected 25 basis points increase of the target rate leads on average to a 113 basis points negative market return within five minutes after the announcement. It also increases market volatility during the 60-minute window around the announcement with 147 basis points. Positive surprises, meaning bad news for stocks, provoke a stronger reaction than negative surprises. Market participants also respond differently to good and bad news. In case of bad news for stocks the fact that there is a surprise matters most, whereas in case of good news the magnitude of the surprise is more important. Across sectors, Financials and IT show the strongest response to target rate surprises.

Keywords: high-frequency data; interest rate surprises; monetary policy announcements; realized volatility (search for similar items in EconPapers)
JEL-codes: G21 G3 M (search for similar items in EconPapers)
Date: 2007-10-25
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Citations: View citations in EconPapers (2)

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