Task 2: Stock Market Reaction to FOMC Announcement

US monetary policy can be measured by changes in the Federal funds rate, which are announced by the Federal Open Market Committee (FOMC) meetings. Given the importance of monetary policy to the whole economy, investors pay special attention to the FOMC announcements. In the attached dataset (“Event Study.csv”), we have collected data on FOMC announcements from 1989 to 2007 and the aggregate stock market reactions to it.

Here is a list of variables:

• Date: FOMC announcement date

• Return: S&P 500 index return on the announcement date  (in percentage)

• Total change: change of Federal fund rate  (in bps)

• Expected:  investors’ expected change of Federal fund rate, which is estimated based on the futures contracts written on the Federal fund rate (in bps)

• Surprise: the difference between Total change and Expected, which measures the change that is out of expectation of investors (in bps)

• Scheduled: equals to 1 if the FOMC is scheduled, and 0 if not.

a) Run three regressions and report the estimation results according.   

[Note: please report the coefficient and t-statistics, indicate significance with difference levels, and the adjusted R-squared of the regression.] [pls provide your R code in the end of word file]

In the first regression, Y is Return, X is Total change;

In the second regression, Y is Return, X is Expected;

In the third regression, Y is Return, X is Surprise.

b) Comparing the three regression results, which X variable explains Y the best?

Why that is the case? [Note: you may link it with market efficiency and event study]

c) Create a variable which equals to Scheduled*Surprise, and then run a regression in

which Y is Return, the first X variable is Surprise, and the second X variable is Scheduled*Surprise.  Report the regression results. [pls provide your R code]

d) Based on the results, is the effect of Surprise on Return dependent on whether the FOMC meeting is scheduled or not? Please explain.

event-study