The Fed policy announcement effect on the equity market

A Work Project, presented as part of the requirements for the Award of a Masters Degree in Finance from the NOVA – School of Business and Economics

Fed Policy announcements have always created controversy when analyzing its effects on asset prices. This project analyzes the relationship between the Fed announcements and the stock market’s return. We use an econometric methodology suggested by Kenneth Kuttner (2000) that uses the futures market to divide the announcement in two parts the expected and unexpected component. The relationship between the equity market reaction and the Fed policy announcements has shown to be statistically significant. A considerably negative reaction of the equity market has been observed in response to an unexpected announcement by the Federal Reserve while the expected part of the announcement revealed to have no effect on the equity market. This relation was also tested for the existence of asymmetries and cross industry effect.