Analyst Forecast Dispersion and Market Quality Surrounding the FOMC Announcement

Abstract

We study the relationship between analyst forecast dispersion, a proxy for the opacity of the information environment, and equity market quality surrounding FOMC announcements. Higher forecast dispersion is associated with changes in various market quality metrics. First, trading costs increase as reflected in wider bid-ask spreads and elevated information asymmetry. Moreover, higher forecast dispersion is associated with heightened trading activity and less informationally efficient prices. Overall, our findings highlight the importance of the information environment during major news releases.