Title

Stock Market Responses to Fed Funds Rate Changes

Document Type

Article

Publication Date

2011

Publication Source

Business and Economics Journal

Volume

2011

Issue

BEJ-29

Inclusive pages

1-7

ISBN/ISSN

21516219

Peer Reviewed

yes

Abstract

Proponents of the semi-strong form of the Efficient Market Hypothesis argue that stock prices fully reflect all publicly available information. Furthermore, economic models assume that investors rationally evaluate future market performance and that there is no systematic bias in investor expectations. This paper empirically evaluates these hypotheses in the context of stock market response following the FOMC’s announcements on the target fed funds rate. In particular, the paper shows that investors systematically underestimate stock market response to the fed funds rate changes, which creates profitable arbitrage opportunities.

Disciplines

Economics

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