On the "Hirshleifer effect'' of unscheduled monetary policy announcements.

Abstract

When monetary policy announcements are expected to occur at scheduled dates, the event of an unscheduled announcement often "surprises" financial markets. However, if the information provider knows the future policy beforehand, he might be induced to anticipate the release of information without waiting for the next scheduled date, on the assumption that better informed traders will be able to attain superior equilibria. On October 15,.1998, January 3 and April 18, 2001 the chairman of U.S. Fed announced a half point interest rate cut well before the next scheduled meeting. The real surprise for the markets was the timing, not the content, of the announcement. In this paper we look at the volume of trade in interest rate futures before these three dates and compare it to the volume of trade before scheduled meetings. We argue that the wrong timing of policy announcements might involve an "Hirshleifer effect" and prevent a significant volumes of securities to transact for hedging purposes.