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Student
Title
Supervisor
Faculty
Educational Programme
Final Grade
Year of Graduation
Polina Balakireva
The Model of the Pre-FOMC Announcement Drift with the Slow-Moving Capital
Financial Economics
(Master’s programme)
2018
In this paper an attempt to provide theoretical background for models of announcements was made considering the case of FOMC announcements. Scientific literature provides an evidence of significant increase in equity premium before FOMC announcements. It was noticed that in days of the announcement excess returns on the US stocks were much higher (around 80% of the annual excess return or 55% of the market equity premium ) than in all other days. This study employs the parsimonious case of an announcement model with expected utility function. Two types of agents (frequent and infrequent) were introduced in the model in order to implement slow-moving capital, which has a potential to resolve the puzzling effect of macroeconomic announcements described above. As a result, it was found that this improvement of simple expected utility model gives a positive announcement premium. This can be an indicator of our model’s explanatory power.

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