Job Market Paper
Pre-FOMC Announcement Drift and Speculative Trading
Lucca and Moench (2015) document a significant upward drift in the stock market in the 24 hours preceding FOMC meeting. This drift is not conditional on realized monetary policy shocks. This paper offers an explanation for this finding based on disagreement and short-selling constraints. When investors hold heterogeneous beliefs about the content of the upcoming monetary policy announcement and for some market participants it is costly or impossible to short-sell, speculative demand from optimistic investors can drive up prices before the announcement. This can be especially the case for stocks that are more sensitive to the monetary policy shocks, more expensive to short-sell, and during periods of high disagreement about the FOMC decisions. I confirm this intuition in a series of empirical tests using the cross-section of US equities.
Work in Progress
Bank Capital and Monetary Policy Shocks (with Christian Jauregui)
What could monetary policy shocks tell us about optimal bank capital requirements? We argue that news revealed around FOMC announcements can be viewed as natural stress-tests affecting U.S. banks differently depending on their equity capital ratios. The heterogeneous response of banks’ equity prices and bond yields to surprises in interest rates is revealing of how financial markets favorably value excess capital. We show the equity price of a bank in the 75th percentile of total capital ratio is roughly 1/6 less sensitive to monetary policy shocks in comparison to that of a bank in the 25th percentile. Similarly, corporate bond yields of banks with larger capital ratios are better insulated against unexpected changes in the “slope”, or rate of change, of monetary policy. We conclude that higher capital requirements are viewed positively by market participants.
Teaching assistant - University of California, Berkeley
- MFE Program, Haas School of Business (Stochastic Calculus with Asset Pricing Applications)
- Department of Economics (undergraduate Macroeconomics, Microeconomics, Financial Economics, Behavioral Finance)