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Designing an Event Study of FOMC Announcements and the Dow

Article Quant Q&A · Author: David
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Summary

The document outlines a proposed event study of scheduled FOMC announcements and the Dow Jones Industrial Average across two periods, using daily open and close data. The researcher wants to examine price behavior in the days before announcements for possible anticipation and in the days afterward for how quickly news is incorporated. The plan also considers a separate comparison of unscheduled meetings with scheduled events, using lead and lag indicators to measure reactions.

The text is a research question rather than a completed analysis: it provides no event-study estimates, significance tests, or conclusions about market efficiency. It asks whether a single index can serve as the subject of an event study, since familiar examples often compare an individual stock with a market benchmark to estimate normal and abnormal returns. Limited data access prevents use of intraday observations, so daily prices may obscure the timing and size of immediate announcement effects. The document mentions Stata and a suggested event-study command, but offers no implementation or validated methodology.

Key ideas

  • The proposed study examines Dow returns around scheduled FOMC announcements.
  • The design looks for price movement before announcements and persistence afterward.
  • Unscheduled meetings are proposed as a separate event group for comparison.
  • Daily open and close observations limit analysis of immediate intraday reactions.
  • The document raises, but does not resolve, how to estimate abnormal returns for a single index.

Tags

Event-drivenEquitiesUS marketsStatistics
Full text
# How to conduct an event-study for a single index (i.e the DJIA) with multiple events


# How to conduct an event-study for a single index (i.e the DJIA) with multiple events












I am a postgraduate student writing my thesis. I am somewhat a novice in the field I have chosen to study, however this has undoubtedly broadened my horizons. I am attempting to evaluate the impact of FOMC news on the dow jones industrial average and please excuse the speculative request for help but I am getting quite confused with all the material I have seen and would really appreciate a specific direction at this stage.

My study: I have two periods that I will evaluate; 2008 - 2013 and then 2013 - 2018. I have a total of 63 events - 23 in the 2008 - 2013 period and 40 in the 2013 - 2018 period - and I am using open/close data. Due to data access, I was unable to obtain intraday data (for less than £1500) but I feel using the open/close data will enable me to provide a broad view and still comment on any pre-announcement drift and lasting effects of FOMC news (thus commenting on efficient market theory). To that end, I would like to evaluate the way in which the Dow anticipates FOMC news 3 days prior to the announcement and the way in which news is incorporated, 3 days after the event.

I would like to conduct my study using Stata as I believe it will be quicker than attempting to evaluate each event in Excel, further I would like to make use of the estout data output Stata offers.

The majority of event studies I have seen appear to evaluate a stock against an index (eg. apple against the S&P 500 is very common) to thus estimate normal performance, abnormal and cumulative abnormal returns, as well as being able to test for significance. Is it possible to conduct an event study with just the Dow Jones?

I am unsure whether anyone has any direction regarding the use of stata but I also had the idea to evaluate the effects of unscheduled meetings - so effectively, another set of events. I considered using dummies/ changing (d.var d2.var etc) for x days – leading and lagging (1, 2,3, 4 ) to see if there is any reaction and whether it is more dramatic or not of the scheduled meetings. I suppose they would be in reaction to shocks and a such not working in the same way as the schedule ones. I have done something similar on a project that was not finance related so excuse the novice approach but is this something that could still be done using for example, eventstudy2?

Thanks in advance.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.