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Unconventional monetary policy and the behavior of shorts

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Abstract

We investigate the behavior of shorts, considered sophisticated investors, before and after a set of Federal Reserve unconventional monetary policy announcements that spot bond markets did not fully anticipate. Short interest in agency securities systematically predicts bond price changes and other asset returns on the days of monetary announcements, particularly when growth or monetary news is released, indicating shorts correctly anticipated these surprises. Shorts also systematically rebalanced after announcements in the direction of the announcement surprise when the announcement released monetary or growth news, suggesting that shorts interpreted these announcements to imply further yield changes in the same direction.

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  • Thomas H. McInish & Christopher J. Neely & Jade Planchon, 2017. "Unconventional monetary policy and the behavior of shorts," Working Papers 2017-031, Federal Reserve Bank of St. Louis, revised 30 Sep 2021.
    • Handle: RePEc:fip:fedlwp:2017-031
    DOI: 10.20955/wp.2017.031
    Note: Publisher DOI: https://doi.org/10.1111/jmcb.13045
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    More about this item

    Keywords

    Quantitative Easing; Treasury bond short interest; Monetary Policy; Large-Scale Asset Purchases (LSAP); Agency securities; Treasury securities; Great Recession;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G1 - Financial Economics - - General Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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