Wednesday, November 28, 2018

Excess Returns: "Front running Fed-Day’s Eve "

From FT Alphaville:
Some kids just can’t wait for Christmas morning, and beg for a present on Christmas Eve. For traders, Fed Day — the day the Federal Open Market Committee announces its decisions on rates and asset purchases — is no different. And according to an update this week of research from the New York Fed, the kids are now getting antsy even earlier.

In 2013, David Lucca of the New York Fed and Emanuel Moench of Germany’s Bundesbank published a paper showing that, between 1994 and 2011, there was a statistically significant rise in excess returns to almost every major international equity index during the 24-hour period before a meeting of the FOMC. The rise began on the afternoon before Fed Day:
The Fed-Day's Eve bump, they explained, could be due to “attention re-allocation” — poor planning. Traders, busy with other things until the day before, then quickly placed their bets....