EXAMINATION OF THE EFFECTS OF CHANGES IN THE FEDERAL FUNDS RATE TARGET ON THE SHORT-TERM EQUITY MARKET

There have been countless studies proving that the efficient market theory does not allow an investor to earn above average returns on the S&P 500 index with information that is readily available to the general populace. Yet, there have still been many instances where cunning investors were able...

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Bibliographic Details
Main Authors: Sumner, Jacob A, Bacon, Frank W
Format: Conference Proceeding
Language:English
Subjects:
Efficient markets
Equity
Federal funding
Federal funds rate
Financial institutions
Hypotheses
Interest rates
Investments
Prices
Profits
Rates of return
Securities markets
Stock exchanges
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Summary:There have been countless studies proving that the efficient market theory does not allow an investor to earn above average returns on the S&P 500 index with information that is readily available to the general populace. Yet, there have still been many instances where cunning investors were able to do just that within days after changes to the interest rates. This study raises the question of whether the market is truly efficient within the short-run and if not, is it possible for an investor to earn above average returns within this period? Our results show that there is a statistically significant negative correlation between target changes for the federal funds rate and the S&P 500 index in the short run. As previous studies have shown, the market is not efficient in the short-run; if the federal funds rates were lowered, an investor who purchased and held S&P 500 index for a 5-day period would enjoy greater than average returns. As time progresses, this negative correlation decreases lowering the possible returns.
ISSN:1934-0583
1934-0583