The reaction of U.S. hospitality stock prices to Fed policy announcements

This paper is an event study analysis of the reaction of daily U.S. hospitality stock prices to announcements of Federal Open Market Committee decisions concerning the federal funds target rate (FFTR). The study first identifies two components of changes in the FFTR (Delta FFTR), namely the expected and the unexpected (or surprise) components. The surprise component that is not yet priced into the market can be calculated from the change in the federal funds futures rate. According to the efficient market hypothesis that stock prices should have already reflected all information available in the market, it is hypothesized that hospitality stock prices should respond only to the surprise component. Test results support the hypothesis. Except for restaurant index, the responses of airline, gambling, hotel and travel and leisure stock indices to the surprise component of Delta FFTR are highly significant. The corresponding responses to the actual Delta FFTR and the expected component, in contrast, are statistically insignificant. (C) 2011 Elsevier Ltd. All rights reserved.