, Volume 22, Issue 1, pp 3-20
Date: 12 Dec 2007

The Greenspan years: an analysis of the magnitude and speed of the equity market response to FOMC announcements

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We examine the impact of monetary policy on the S&P 500 using intraday data. The analysis shows an economically and statistically significant relationship between S&P 500 intraday returns and changes in the Fed funds target rate. The significance and magnitude of the response is dependent on whether the change was expected or unexpected. An expected change in the Fed funds target rate has no impact on prices in the broad equity market; however, an unexpected change of 25 basis points in the Fed funds target rate results in an approximate 48 basis points decline in the broad equity market’s return. The speed of these market reactions is rapid with the equity market reaching a new equilibrium within 15 minutes.

The authors wish to thank Cynthia Bansak, Angelo Ranaldo, the editor Manuel Ammann, two anonymous referees, and participants at the 2006 Conference of the Swiss Society for Financial Market Research for valuable comments. In addition, we would like to thank Ken French and James Hamilton for comments on a previous version of this paper entitled “The Greenspan Effect on Equity Markets: An Intraday Examination of U.S. Monetary Policy Announcements.” Zebedee gratefully acknowledges the financial support of San Diego State’s Research, Scholarship and Creative Activity Program. All errors are our own responsibility.