FOMC Forward Guidance and Investor Beliefs

摘要

Do central bank announcements and the recent forward guidance provided in these statements affect the beliefs of market investors? Several analyses have found that a significant proportion of changes in the level of yields in response to these monetary policy statements can be attributed to their effects on investor expectations. For instance, Guerkaynak, Sack, and Swanson (2005) find that approximately 75-90 percent of the change in yields due to monetary policy announcements can be explained due to investors incorporating expectations of the monetary policy actions. Campbell et al. (2012) extend this strategy to find that Federal Open Market Committee (FOMC) announcements had an effect on investor beliefs during the Great Recession. However, Swanson and Williams (2014) find that beginning in late 2011, the sensitivity of yield levels to macroeconomic news (including FOMC announcements) was greatly diminished compared to the earlier period. Given the above findings, this paper proposes a new method to examine the effect of monetary policy announcements by the FOMC, and its forward guidance in particular, on investor beliefs in the zero-lower bound regime. The method entails extracting moments of the state-price densities (SPD) of investor beliefs about future asset prices using daily data on two-year and ten-year futures and the corresponding option contracts. These moments capture different aspects of investor behavior. The standard deviation of the SPD denotes the ex ante investor uncertainty about the relevant asset price, the skewness represents the probabilities assigned by investors to positive or negative change in the asset prices, and the excess kurtosis captures the weights assigned by investors to "crash" risk. I find that the extracted moments are time-varying, and respond to the issuance of forward guidance. For example, the extension of the zero-lower bound regime, and the announcement about specific purchases of long-term securities are found to lower the weights assigned by investors to a tail event. These findings about the higher moments of investor beliefs are economically significant. Time-varying uncertainty about future Treasury yields, which responds to monetary policy announcements, is a channel for affecting the optimizing behavior of investors. In Sinha (2014), I construct a DSGE model with Epstein-Zin preferences and a shock to the interest rate uncertainty is found to generate precautionary savings. Furthermore, incorporating skew and kurtosis in investors' preferences is found to affect their portfolio allocation, and the subsequent investment behavior (Guidolin and Timmermann 2008).