The Pre-FOMC Announcement Drift: Empirical Evidence from a Frontier Market
Keywords:
FOMC announcement, Central bank communication, Frontier marketAbstract
This paper examines the impact of Federal Open Market Committee (FOMC) announcements on stock prices in the Vietnamese securities market, using data from January 4, 2010, to December 30, 2022. FOMC decisions regarding the federal funds rate are closely watched by global investors due to their significant influence on financial markets. Within the investigated timeframe, this paper finds evidence of FOMC announcement drift when FOMC decides to decrease the interest rate. In such cases, investors in Vietnamese securities market seem to react positively, resulting in significantly higher stock returns around the announcement. However, there is no such evidence to support the pre-FOMC announcement drift when FOMC decides to increase or unchanged the Feds Fund Rate. These patterns suggest that Vietnamese investors are sensitive to U.S. monetary policy, yet the degree of market reaction varies depending on the direction of policy changes. When extending the research for 5 days before and after the event, this paper finds that Vietnamese investors avoid being exposed in this event by selling enormously before the date. This paper contributes to the literature by highlighting the varying reactions of a frontier market to the U.S. monetary policy decisions.
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