Central Bank Information Shocks, Value Gains, and Value Crashes

Abstract

Monetary policy shocks that convey new macroeconomic information are significant predictors of both the absolute and risk-adjusted returns from value investing. Positive Fed information shocks lead to higher subsequent value returns. Crashes in the returns of value investing are most likely to occur in the aftermath of negative Fed information shocks. The effect of Fed information shocks on value returns and crashes is to a large extent driven by these shocks’ impact on informed trading. Moreover, we show that, in terms of influencing the performance of value strategies, information shocks by the Fed are more impactful than conventional monetary shocks.