Market-Implied Policy-Outcome Dispersion and Long-Run Equity Volatility: Meeting-Level Evidence from Kalshi FOMC Contracts

Abstract

This paper tests whether dispersion in market-implied Federal Open Market Committee outcomes contains information about the long-run component of U.S. equity volatility. For 38 meetings, I construct the crossoutcome variance of Kalshi probabilities over days -30 to -3 and embed it in a fixed (K=4), uniform-weight GARCH-MIDAS model for 824 S&P 500 trading days. The raw loading is 0.3621 (LR = 7.9637; asymptotic p = 0.00477; 999-draw meeting randomization p = 0.027). Conditioning on the implied policy mean, volume, the listed outcome menu, and pre-meeting S&P 500 realized variance gives a loading of 0.3611 (LR = 9.2777; p = 0.00232; conditional randomization p = 0.023). The listed-support specification without realized variance gives 0.3675 and conditional randomization p = 0.018. Activating the factor three business days before, on, or one business day after the meeting yields positive loadings, entropy is insignificant, and all leave-one-meeting-out variance loadings remain positive. In a pseudo-real-time design that begins after three annual policy cycles, re-estimates at each meeting, and freezes parameters until the next meeting, Kalshi reduces mean QLIKE by 2.10 percent over 417 days; the Newey-West p-value is 0.399. The evidence identifies a robust pre-decision relation with the fitted long-run volatility state and a positive but not yet statistically established forecasting gain.

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