Disagreement and Scheduled Announcements: Explaining the Pre-Announcement Drift

Paula Cocoma

♦ We propose a theoretical explanation for the positive pre-announcement drift documented ahead of scheduled announcements, using the Federal Open Market Committee (FOMC) meetings as main example. The framework entails a general equilibrium model of disagreement (differences-of-opinion), where investors interpret a costly signal differently. Investors optimally decide to stop learning from the costly signal when an announcement is imminent, increasing the risk premium ahead of an announcement. The model jointly rationalizes puzzling empirical evidence by generating (1) an upward drift in prices before scheduled announcements, regardless of the announcement’s content, which coexists with (2) low volatility and (3) low trading volume.

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