They tend to struggle with debt instead, but research suggests two ways to change the situation.Why Small Businesses Are More Reluctant to File for Chapter 11
Cumulative market returns on days before/after Federal Open Market Committee policy announcements
CRSP value-weighted index of US stocks, daily closes (1994–2009)
Neuhierl and Weber, 2018
The US policy announcements also affected share prices in foreign markets, according to the research. Share prices in Germany, Canada, France, Spain, Switzerland, and the United Kingdom moved with similar patterns and magnitude around the FOMC surprises.
Even without prior knowledge of the FOMC’s intentions, investors can exploit this drift by buying shares immediately after an expansionary shock and shorting the market when the shock is contractionary, Neuhierl and Weber explain. A strategy that sells those shares 15 days later earns an annualized Sharpe ratio that’s larger by a factor of four than a buy-and-hold strategy. Sharpe ratios measure risk-adjusted returns, with higher numbers indicating less investment risk.
The study followed FOMC announcements starting in 1994, when the Fed first began to communicate its interest-rate intentions openly, then via press releases. The sample period ended in 2009.
The preannouncement movements suggest that some investors know in advance whether an FOMC announcement will meet market expectations.
More from Chicago Booth Review
Credit markets need intermediaries, but there are too many in the system now.Too Many ‘Shadow Banks’ Can Limit Overall Access to Credit
We want to demonstrate our commitment to your privacy. Please review Chicago Booth's privacy notice, which provides information explaining how and why we collect particular information when you visit our website.