The causal effect of limited attention to FOMC announcements

Abstract

Exploiting instances where Federal Open Market Committee (FOMC) announcements fall close to a national holiday in 16 foreign countries, this paper finds that exogenous holiday-induced inattention suppresses pre-FOMC anomalies and delays post-FOMC reactions in the local benchmark stock index, suggesting that distracted local investors forget that an announcement is scheduled. This result demonstrates that even the most salient global news items can be subject to investor neglect, provides a stark counterexample to the prevailing assumption that attention generates higher trade volume, and helps narrow the range of plausible explanations for the return drift frequently observed before major macroeconomic announcements.