A Structural Approach to High-Frequency Event Studies: The Fed and Markets as Case History
We develop a methodology to integrate a high-frequency event study into a macro-finance model and structural estimation. The methodology is applied to Federal Reserve announcements in a model where investor beliefs about the economic state and/or regime change in future policy can jump in response to monetary news. We find that stock market volatility in narrow windows around policy announcements is frequently driven by jumps in beliefs about future policy rules that affect subjective risk premia. Such jumps often generate positive comovement between short rates and the stock market, erroneously suggesting a role for “Fed information shocks.”
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