An event study analysis of U.S. hospitality stock prices' reaction to Fed policy announcements

Transcription

1 Universiy of Massachuses - Amhers ScholarWorks@UMass Amhers Inernaional CHRIE Conference-Refereed Track 011 ICHRIE Conference Jul 7h, 3:15 PM - 4:15 PM An even sudy analysis of U.S. hospialiy sock prices' reacion o Fed policy announcemens Ming-Hsiang Chen Naional Chung Cheng Universiy, finmhc@ccu.edu.w Chen, Ming-Hsiang, "An even sudy analysis of U.S. hospialiy sock prices' reacion o Fed policy announcemens" (011). Inernaional CHRIE Conference-Refereed Track. 8. hp://scholarworks.umass.edu/refereed/ichrie_011/wednesday/8 This Empirical Refereed Paper is brough o you for free and open access by he Hospialiy & Tourism Managemen a ScholarWorks@UMass Amhers. I has been acceped for inclusion in Inernaional CHRIE Conference-Refereed Track by an auhorized edior of ScholarWorks@UMass Amhers. For more informaion, please conac scholarworks@library.umass.edu.

2 AN EVENT STUDY Chen: ANALYSIS U.S. hospialiy OF sock U.S. prices' HOSPITALITY reacion o Fed policy STOCK announcemens PRICES REACTION TO FED POLICYANNOUNCEMENTS Ming-Hsiang Chen Naional Chung Cheng Universiy Chia-Yi, Taiwan, ROC ABSTRACT This paper is an even sudy analysis of he reacion of daily U.S. hospialiy sock prices o announcemens of Federal Open Marke Commiee decisions concerning he federal funds arge rae (FFTR). The sudy firs idenifies wo componens of changes in he FFTR, namely he expeced and he unexpeced (or surprise) componens. The surprise componen ha is no ye priced ino he marke can be calculaed from he change in he federal funds fuures rae. According o he efficien marke hypohesis ha sock prices should have already refleced all informaion available in he marke, i is hypohesized ha hospialiy sock prices should respond only o he surprise componen. Tes resuls suppor he hypohesis. Excep for resauran index, he responses of airline, gambling, hoel and ravel and leisure sock indices o he surprise componen of changes in he FFTR are highly significan. The corresponding responses o he acual changes in he FFTR and he expeced componen, in conras, are saisically insignifican. Key Words: U.S. hospialiy socks; Even sudy; Federal funds arge rae; Federal funds fuures rae INTRODUCTION Many financial sudies have analyzed he impac of Federal Reserve (Fed) moneary policy on sock reurns (for example, Bernanke and Kuner, 005; Conover e al., 1999; Kuner, 001; Thorbecke, 1997). Empirical findings suppor a srong link beween equiy reurns and moneary policy changes. Several recen papers have examined wheher changes in moneary policy could significanly influence sock performance in differen hospialiy secors. Barrows and Naka (1994) invesigaed he effec of economic variables on U.S. hospialiy sock reurns and revealed ha U.S. resauran and lodging sock reurns were srongly relaed o money supply growh raes. Chen e al. (005) showed ha money supply growh raes could explain hoel sock reurns in Taiwan. Moreover, moneary facor measured by lag changes in discoun rae were found o be an explanaory facor of hoel sock reurns in China (Chen, 007b). Chen (007a) repored ha Taiwanese hoel socks performed beer under an expansive moneary condiion. This paper conribues o he hospialiy lieraure by analyzing he reacion of daily U.S. hospialiy sock prices o announcemens of Federal Open Marke Commiee (FOMC) decisions concerning he federal funds arge rae (FFTR). By applying Kuner s (001) mehodology, he sudy isolaes he unanicipaed componen of policy acions. Specifically, by using federal funds fuures daa o consruc a measure of he unexpeced (or surprise) componen of he FFTR change, Kuner (001) found ha he surprise componen has a significan impac on U.S. bill, noe and bond yields. Since hen, he mehodology has been widely used by academic research papers o examine he impac of moneary policy surprise on sock marke reurns. For example, Bernanke and Kuner (005) repored ha sock marke prices responded only o he surprise change in FFTR. Basisha and Kurov (008) invesigaed he reacion of sock reurns o surprise FFTR changes in differen economic condiions. Jansen and Tsai (010) esed asymmeries in he impac of surprise FFTR changes on sock reurns in bull and bear markes. However, no sudies o dae have examined he effec of moneary policy surprise on hospialiy sock performance. Moreover, while he previous hospialiy finance sudies idenified several significan moneary explanaory facors of hospialiy sock reurns, he moneary policy measures used in heir sudies, such as growh raes of money supply or changes in discoun raes, may coincide wih changes in business cycle and/or oher relevan economic variables. The significan effec found in hose papers could be aribued o economic facors raher han o moneary policy. As Bernanke and Kuner (005) noed, i is difficul o esimae he response of sock prices o Fed moneary policy acions because he sock marke is unlikely o respond o Fed policy acions ha were already anicipaed. Disinguishing expeced from unexpeced Fed policy acions is herefore Published criical in by deecing ScholarWorks@UMass policy effecs. Amhers,

3 Inernaional CHRIE Conference-Refereed Track, Even 8 [011] This paper is he firs in he hospialiy lieraure o idenify he surprise elemen of moneary policy changes and examine he reacion of hospialiy sock prices o moneary policy surprises. Noe ha he surprise componen is he unanicipaed componen ha has no been already priced ino he marke. According o he efficien marke hypohesis ha asse prices should have already refleced all informaion available in he marke, i is herefore hypohesized ha he response of hospialiy sock prices o he surprise componen in moneary policy announcemens should be highly significan and, however, o he expeced componen should be negligible. DATA AND VARIABLES IN AN EVENT STUDY ANALYSIS In recen years, he Fed has focused more on he federal funds rae (FFR): he ineres rae on overnigh loans of reserves from one bank o anoher. These overnigh loans of reserves occur because some banks need o borrow funds o mee reserve requiremens se by he Fed, while oher banks have excess funds. On he oher hand, he FFTR is deermined by a meeing of he members of he FOMC. In pracice, when argeing a specific FFR, he Fed increases or decreases he money supply hrough open marke operaions o push he federal funds o he argeed value. Since February 1994, he Fed has announced a FFR arge a each FOMC meeing and his announcemen is wached closely by marke paricipans because i influences he ineres rae hroughou he economy. To measure he impac of Fed policy acions on U.S. hospialiy sock prices, i is necessary o calculae he reacion of hospialiy sock prices o FFTR changes on he day of he change. The mehodology used in he sudy could be described as an even-sudy syle of analysis because i examines he response o FOMC meeings and announcemens. The relevan sample would be he se of all days corresponding o FOMC meeings. Since February 1994, he FOMC has announced he curren FFTR immediaely afer an FOMC meeing. This sudy sars he sample on February 4, 1994, which is he firs even (announcemen) wih a 5-basis-poin rae cu (a decrease of 0.5%). The las even in he sample is he FOMC meeing on Ocober 5, 006, which does no change he curren FFTR. Following Kuner (001), he unscheduled FOMC meeings are omied. As a resul, he sample conains 10 observaions, including 30 increases, 15 decreases and 57 non-changed. All funds rae daa are obained from he websie of he Federal Reserve Bank of New York (hp:// To analyze he reacion of U.S. hospialiy sock prices o FFR changes, he daily hospialiy index reurns on each sample even day are compued as: HIR = ln( HI ) HI 100%, where 1 HI is he daily closing index for each hospialiy secor on day. Similarly, he daily marke reurns are calculaed as MR = ln( 500 SP 500 ) SP 1 100%, where SP500 is he daily S&P 500 closing index on each even day. The five hospialiy secors covered in he sudy are airline, hoel, resauran and ravel and leisure. Five hospialiy secor indices and he S&P 500 index are aken from he DaaSream daabase. To disinguish anicipaed from unanicipaed Fed policy acions, Kuner (001) derived a measure of he surprise (unexpeced) elemen of any specific change in he federal funds arge from he change in he fuures conrac s price relaive o he day before he policy acion. Specifically, given ha an even (announcemen) akes place on day d of monh m, he unexpeced (or surprise) componen of arge funds rae change can be calculaed from he change in he rae implied by he curren-monh fuures conrac. The surprise elemen of he FFTR change can be compued based on he change in he implied rae of he curren-monh federal funds fuures on he day of he Fed policy decision (Kuner, 001). The one-day arge funds rae surprise for day d is given as: D 0 0 Surprise FR m FR, (1) ( ) =, d m, d 1 D d where Surprise is he unexpeced FFTR change, 0 FR m,d day d, 0 is he curren-monh 30-day federal funds fuures rae on FR is he curren-monh 30-day federal funds fuures rae on day d 1, D is he number of days in he m, d 1 monh m, and d is he day of he curren FOMC meeing. Bernanke and Kuner (005) explained ha his mehod is generally a good gauge of he surprise change in he arge FFR because he monhly average of he effecive FFR on which he conrac is based is very close o he average arge rae. Accordingly, he expeced componen of changes in FFTR ( FFTR ) can be defined as he acual FFTR minus he surprise: Expeced = FFTR Surprise. Figure 1 depics he surprise componen of acual changes hp://scholarworks.umass.edu/refereed/ichrie_011/wednesday/8 in FFTR on all even days. As shown in Figure 1, he surprises occurred frequenly, indicaing

4 ha i is no always easy for Chen: marke U.S. hospialiy paricipans sock o prices' make reacion correc o Fed predicions policy announcemens of FFTR. Figure 1 The surprise componen of acual FFTR (basis poin) M0 94M11 95M09 96M07 97M03 97M1 98M09 99M06 00M03 00M1 01M10 0M06 03M03 03M1 04M09 05M06 06M03 MODEL AND RESULTS To assess he reacion of hospialiy sock prices o moneary policy acions, his sudy examines one-day response of hospialiy socks o FFTR. The procedure involves regressing daily hospialiy index reurns on daily FFTR on all even days: Model I: HIR = α + β FFTR + ε, () 1 1 where he error erm ε represens facors oher han moneary policy ha affec hospialiy sock prices on even day. One shorcoming of Model I is ha moneary policy changes are simply measured as changes in FFTR on days of FOMC meeings. Bernanke and Kuner (005) has shown ha on he day of announcemen, mos sock prices reac no o he announcemens hemselves, bu o heir unexpeced componen ha is no already priced ino he marke. To separae he effecs of expeced and unexpeced FFTR changes on hospialiy index reurns, Model II is based on Eq. (3): e s Model II: HIR = α + β Expeced + β Surprise + v, (3) where Expeced and Surprise denoe he expeced and surprise componens of changes in FFTR, respecively. The coefficiens e β and s β represen he corresponding effecs of expeced and surprise FFR changes on hospialiy index reurns. Table 1 repors he esimaion resuls of he responses of hospialiy sock indices o FFTR based on Model I. For all five hospialiy and he marke secors, he coefficien β is saisically insignifican. The 1 explanaory power (adjused R value) is very small. These resuls sugges ha hospialiy and marke reurns do no significanly respond o acual FFTR. Table 1. The responses of U.S. hospialiy indices o FFTR Secor Consan FFTR F-saisic [p-value] R Airline (1.14) (-1.4) 0.88 [0.35] 0.01 Gambling (-.54) *** (-0.06) 0.01 [0.95] 0.00 Hoel (0.83) 0.1 (0.3) 0.03 [0.85] 0.00 Resauran 9.50 (0.74) 0.76 (1.34) 1.61 [0.1] 0.01 Travel and leisure 1.65 (0.83) 0.66 (0.74) 1.19 [0.8] 0.01 S&P (1.71) * 0.44 (0.86) 1.06 [0.31] 0.01 Noes: The numbers in parenheses are he Newey and Wes (1987) correced -saisics. * Saisical significance a he 10% level. ** Saisical significance a he 5% level. *** Saisical significance a he 1% level. Tes resuls of he responses of hospialiy sock index reurns o FFTR according o Model II are summarized in Table. When he facor FFTR is broken ino is expeced and surprise componens, he coefficien s β is negaive and saisically significan for he airline, gambling, hoel, ravel and leisure and Published by ScholarWorks@UMass Amhers, 011 Table 3 3

5 The responses of Inernaional U.S. hospialiy CHRIE index Conference-Refereed reurns o Track, he surprise Even 8 [011] and expeced FFTR Secor Consan Expeced Surprise F-saisic [p-value] R Airline (1.05) (-0.07) (-1.93) *.19 [0.1] 0.04 Gambling (-.50) *** 0.55 (0.51) -5.9 (.04) ** 1.05 [0.35] 0.0 Hoel 9.71 (0.67) 1.0 (1.50) (-.80) *** 4.7 [0.01] *** 0.09 Resauran 9.58 (0.75) 0.71 (1.5) 1.0 (0.49) 0.81 [0.45] 0.0 Travel and leisure (0.73) 1.68 (1.9) * (-4.17) *** 8.11 [0.00] *** 0.14 S&P (1.73) * 1.14 (.56) *** (-3.47) *** 7.47 [0.00] *** 0.13 marke secors, implying ha sock indices of hospialiy secors, excep for resauran, significanly respond o he surprise componen of FFTR. Tes resuls furher indicae a -7.80% one-day airline index reurns in response o a 1% poin surprise rae increase. Similarly, a 1% poin surprise rae increase leads o a corresponding -5.9%, -8.78%, -9.45% and -6.45% one-day index reurns for gambling, hoel, ravel and leisure and marke secors on he even days. Noneheless, he responses of hospialiy sock indices o he expeced e componen indicaed by he coefficien β are much smaller han hose o he surprise componen and are insignifican in general. The adjused R value reveals ha 4% of variance in airline index reurns and % of variance in gambling index reurns on he even days is associaed wih news abou moneary policy. In comparison, he percenage of variance in reurns explained by Fed funds rae surprise is much higher for he hoel, ravel and leisure and marke secors: 9%, 14% and 13%, respecively. Moreover, F-saisic shows ha he expeced componen ogeher wih he surprise componen can significanly explain he hoel, ravel and leisure and marke index reurns, bu fail o explain he airline, gambling and resauran index reurns significanly. CONCLUSION This paper examines he reacion of daily U.S. hospialiy sock indices o Fed moneary policy announcemens, and specifically o FFTR. An imporan issue arises when measuring he response of U.S. hospialiy index reurns o Fed policy acions is he correc idenificaion of moneary policy changes. Previous sudies in he hospialiy lieraure used growh raes of money supply or changes in discoun raes as he measures of moneary policy. However, he problem wih hese measures is ha growh raes of money supply or changes in discoun raes can coincide wih changes in some oher relevan economic variables and he effec aribued o moneary policy in hose papers may reflec oher facors. To esimae he response of hospialiy sock indices o FFTR accuraely, his sudy uses federal funds fuures daa o separae unanicipaed changes in he arge rae from anicipaed changes. Tes resuls based on an even sudy analysis find ha excep for resauran index, he responses of airline, gambling, hoel and ravel and leisure sock indices o he surprise componen of he acual FFTR are large and highly significan. On he conrary, he corresponding responses o he acual FFTR and he expeced componen are saisically insignifican. Empirical findings have some imporan implicaions. As menioned, he efficien marke hypohesis saes ha sock prices should reflec all informaion available in he marke, hospialiy sock prices are expeced o respond only o he surprise componen in moneary policy announcemens. Tes resuls from airline, gambling, hoel and ravel and leisure secor suppor he efficien marke hypohesis. Furher, his sudy shows ha i is criical o disinguish anicipaed from unanicipaed Fed policy acions; he failure o do so could inroduce a significan bias in empirical esimaions of he reacion of U.S. hospialiy index reurns o changes in moneary policy. In addiion, Nowak (1993) argued ha moneary policy changes are likely o have a srong impac on indusries ha are sensiive o he ineres rae and on hose indusries wih a subsanial expor or impor componens. The possible reason for he high responses of airline, gambling and hoel sock indices o FFTR surprises could reflec he fac ha hese indusries are capial-inensive, and require regular and large invesmen decisions. Therefore, changes in he cos of capial and ineres rae changes induced by moneary policy changes would have a bigger impac on expeced fuure corporae earnings of capial-inensive indusries, which should hp://scholarworks.umass.edu/refereed/ichrie_011/wednesday/8 be refleced in he responsiveness of sock index reurns. In comparison, he resauran indusry 4 is 4

6 less capial-inensive and Skalpe Chen: U.S. (003) hospialiy argued sock ha prices' he reacion performance o Fed policy of resaurans announcemens primarily depends on he choice of an appropriae locaion and a limied amoun of capial o equip and furnish he faciliy. These may explain he insignifican responses of resauran index reurn o FFTR surprises. Furhermore, moneary policy changes have an influence on exchange raes. An appreciaion or depreciaion in currency can significanly affec fuure corporae earnings of firms in hose indusries ha engage in inernaional rade. For example, a devaluaion of he U.S. dollar makes ravel and leisure aciviies more cosly, especially by reducing he willingness of ravelers o ravel inernaionally. Therefore, he relaive openness of he ravel and leisure indusry o rade could be he reason for he srong response of ravel and leisure index o FFTR surprises. Finally, examining cyclical variaion in he effec of Fed policy on he sock marke, Basisha and Kurov (008) found a much sronger response of sock reurns o unexpeced changes in he FFTR in economic recession. Jansen and Tsai (010) analyzed wheher surprise FFTR changes have differen effecs on sock reurns in bull and bear markes. They repored ha he influence of surprise FFTR changes on sock reurns in a bear marke was higher han ha in a bull marke. Fuure sudies can invesigae wheher he reacion of hospialiy sock prices o moneary policy surprises varies a he differen sages of business cycle and in differen sock marke condiions. REFERENCES Barrows, C.W. and Naka, A. (1994). Use of macroeconomic variables o evaluae seleced hospialiy sock reurns in he U.S. Inernaional Journal of Hospialiy Managemen 13: Basisha, A. and Kurov, A. (008). Macroeconomic cycles and he sock marke s reacion o moneary policy. Journal of Banking and Finance 3: Bernanke, B.S. and Kuner, K.N. (005). Wha explains he sock marke s reacion o Federal Reserve policy? Journal of Finance 60: Chen, M.H. (007a). Hoel sock performance and moneary condiions. Inernaional Journal of Hospialiy Managemen 6: Chen, M.H. (007b). Macro and non-macro explanaory facors of Chinese hoel sock reurns. Inernaional Journal of Hospialiy Managemen 6: Chen, M.H., Kim, W.G. and Kim, H. J. (005). The impac of macroeconomic and non-macroeconomic forces on hoel sock reurns. Inernaional Journal of Hospialiy Managemen 4: Conovar, C.M., Jensen, G.R. and Johnson, R.R. (1999). Moneary environmens and inernaional sock reurns. Journal of Banking and Finance 3: Jansen, D.W. and Tsai, C.L. (010). Moneary policy and sock reurns: Financing consrains and asymmeries in bull and bear markes. Journal of Empirical Finance 17: Kuner, K.N. (001). Moneary policy surprises and he ineres raes: Evidence from he Fed funds fuures marke. Journal of Moneary Economics 47: Skalpe, O. (003). Hoel and resaurans- are he risks rewarded? Evidence from Norway. Tourism Managemen 4: Thorbecke, W. (1997). On sock marke reurns and moneary policy. Journal of Finance 5: Published by ScholarWorks@UMass Amhers,