A study of stock price reactions to the decisions of the Federal Open Market Committee (FOMC) on changes in the federal funds rate.
Description: This paper analyzes stock index reactions to interest rate actions by the FOMC. Unlike previous analyses this study utilizes macro-economic indicators and accounts for pre-decision market expectations. Results indicate significant reaction of the stock market to the actions of the FOMC regardless of interest rate actions matching pre-decision market expectations. Binary dummy variables representing the five days following an FOMC meeting indicate a significant reaction for days one; two and three of the Dow Jones model and for day five of the NASDAQ model. The magnitude of the coefficients are 0.17%, 0.09%, -0.07% and -.15% respectively. These findings may be sensitive to a priori choices regarding the definition of the market expectation variable.
Date: May 2002
Creator: Bushnell, Wesley