Volume dynamics around FOMC announcements

Revised version published on 22 May 2023.

BIS Working Papers  |  No 1079  | 
06 March 2023



From 1994 to 2011, about 80% of excess returns in the equity market could be obtained in the 24 hours before scheduled Federal Open Committee (FOMC) announcements. In the standard economic paradigm, price is determined through trading between buyers and sellers. The 1987 market crash demonstrated that the mechanics of trading can significantly affect market prices. To shed light on the price formation process, this paper studies the volume dynamics around FOMC announcements.


I quantify the volume changes in the stock market around FOMC announcements using intraday data. Most studies that analyse the impact of FOMC announcements on the stock market concentrate on price dynamics. In comparison, the evidence on volume dynamics is scant. I also link the FOMC volume dynamics to a theory of discretionary liquidity trading. Lastly, I examine the FOMC volume dynamics for individual stocks and link it to firm characteristics.


Turnover volume in the stock market decreases before FOMC announcements and increases afterward. Additionally, absolute order imbalance increases ahead of FOMC announcements, especially when the announcements are accompanied by policy rate changes. These findings are consistent with a theory in which some liquidity traders strategically choose to avoid trading at times when private information is present in the market. The FOMC volume dynamics are also found to be more pronounced for stocks that are more exposed to discretionary liquidity trading. On average, one third of the pre-FOMC price drift can be attributed to the volume dynamics and liquidity shocks.


The stock market volume decreases in anticipation of FOMC announcements and increases afterwards. I develop a stylized model and attribute the volume dynamics to discretionary liquidity trading resulting from the presence of private information.  Consistent with the model's prediction, I find information asymmetry increases ahead of FOMC announcements, especially before large target rate surprises. Using firm-level high-frequency data, I also find, in the cross-section, that volume changes  around these events are particularly stronger for stocks that are more exposed to discretionary liquidity trading. Volume dynamics and liquidity shocks can explain around one third of the pre-FOMC price drift. 

JEL Classification: D18, G12, G14

Keywords: macroeconomic news, trading volume, liquidity, information asymmetry