Research Presentation by Dr. Masahiro Watanabe

Fri., Oct. 3, 2014 3:00 p.m.

Location: Education Building, Room 560

The Faculty of Business Administration hosts a regular Speakers Series, including regular Research Presentations by Faculty members (October through April).

Our next presentation will be "Understanding the Pre-FOMC Announcement Drive"

Presented by Dr. Masahiro Watanabe:
Date: Friday, October 3
Time: 3:30 - 5:00 pm
Location: University of Regina, Education Building, Room 560

Abstract:
Using high-frequency stock level trade data, we study potential drivers of the puzzling drift in aggregate equity prices prior to FOMC announcements. We find that purchases dominate as volume falls during the pre-FOMC window. This makes the trades more informative. When we condition price changes on the aggregate five-minute order imbalance, the pre-FOMC drift becomes insignificant, implying that the drift can be explained by increased buying pressure for individual stocks. Conditioning on the market imbalance eliminates the drift in six size-BM sorted portfolios, while incorporating portfolio imbalances is less successful. Imbalances in small (large) trades do well at explaining the small (big) stock drift. These results suggest that more intense trading in a thinner market can explain part of the drift, and imply that solutions to the pre-FOMC drift puzzle could revolve around uncovering the identities of traders who buy more aggressively before FOMC announcements.