Working Paper

Unconventional monetary policy and the behavior of shorts

Abstract: In November 2008, the Federal Reserve announced the first of a series of unconventional monetary policies, which would include asset purchases and forward guidance, to reduce long-term interest rates. We investigate the behavior of shorts, considered sophisticated investors, before and after a set of these 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: Quantitative Easing; Treasury bond short interest; Monetary Policy; Large-Scale Asset Purchases (LSAP); Agency securities; Treasury securities; Great Recession;

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: 2019-10-30

Number: 2017-31

Pages: 47 pages

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