Working Paper Revision

Unconventional monetary policy and the behavior of shorts

Abstract: We investigate the behavior of shorts, considered sophisticated investors, before and after a set of Federal Reserve unconventional monetary policy announcements that spot bond markets did not fully anticipate. Short interest in agency securities systematically predicts bond price changes and other asset returns on the days of monetary announcements, particularly when growth or monetary news is released, indicating shorts correctly anticipated these surprises. Shorts also systematically adjusted their positions after announcements in the direction of the announcement surprise when the announcement released growth news, suggesting that shorts interpreted monetary events to imply further yield changes in the same direction.

Keywords: Monetary Policy; Great Recession; Treasury securities; Agency securities; Quantitative Easing; Large-Scale Asset Purchases (LSAP); Treasury bond short interest;

JEL Classification: E4; E44; E52; G01; G18;

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Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2020-07-31

Number: 2017-031

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