A seminar by Assistant Professor Chao Ying from the Chinese University of Hong Kong
Title: The Pre-FOMC Announcement Drift and Private Information: Kyle Meets Macro-Finance
Abstract: This paper studies the private information explanation for the timing and time series of the pre-FOMC announcement drift. I document informed trading is in the same direction as the realized returns in the 24-hour window before FOMC. I extend Kyle’s (1985) model to be the case where market makers are compensated for the riskiness of assets’ fundamentals. Observing aggregate order flow, market makers update their belief about the marginal-utility-weighted asset value, which gradually resolves uncertainty, resulting in an upward drift in market prices. I demonstrate a strictly positive pre-FOMC announcement drift if and only if market makers require risk compensation.
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