Hostname: page-component-78c5997874-s2hrs Total loading time: 0 Render date: 2024-11-03T08:44:57.711Z Has data issue: false hasContentIssue false
  • English
  • Français

How Much Do Investors Care About Macroeconomic Risk? Evidence from Scheduled Economic Announcements

Published online by Cambridge University Press:  05 April 2013

Pavel Savor  and
Mungo Wilson
Pavel Savor
Affiliation:
[email protected], Fox School of Business, Temple University, 1801 Liacouras Walk, Philadelphia, PA 19122, and Oxford-Man Institute
Mungo Wilson
Affiliation:
[email protected], Said Business School, Oxford University, Park End St, Oxford OX1 1HP, United Kingdom, and Oxford-Man Institute.
Get access Rights & Permissions [Opens in a new window]

Abstract

Stock market average returns and Sharpe ratios are significantly higher on days when important macroeconomic news about inflation, unemployment, or interest rates is scheduled for announcement. The average announcement-day excess return from 1958 to 2009 is 11.4 basis points (bp) versus 1.1 bp for all the other days, suggesting that over 60% of the cumulative annual equity risk premium is earned on announcement days. The Sharpe ratio is 10 times higher. In contrast, the risk-free rate is detectably lower on announcement days, consistent with a precautionary saving motive. Our results demonstrate a trade-off between macroeconomic risk and asset returns, and provide an estimate of the premium investors demand to bear this risk.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 48 , Issue 2 , April 2013 , pp. 343 - 375
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2013 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Andersen, T. G.; Bollerslev, T.; Diebold, F. X.; and Vega, C.. “Real-Time Price Discovery in Stock, Bond and Foreign Exchange Markets.” Journal of International Economics, 73 (2007), 251–277.CrossRefGoogle Scholar
Ariel, R. A. “A Monthly Effect in Stock Returns.” Journal of Financial Economics, 19 (1987),161–174.CrossRefGoogle Scholar
Ariel, R. A. “High Stock Returns Before Holidays: Existence and Evidence on Possible Causes.” Journal of Finance, 45 (1990), 1611–1626.CrossRefGoogle Scholar
Balduzzi, P.; Elton, E. J.; and Green, T. C.. “Economic News and Bond Prices: Evidence from the U.S. Treasury Market.” Journal of Financial and Quantitative Analysis, 36 (2001), 523–543.CrossRefGoogle Scholar
Ball, R., and Kothari, S. P.. “Security Returns around Earnings Announcements.” Accounting Review, 66 (1991), 718–738.Google Scholar
Bansal, R.; Khatacharian, V.; and Yaron, A.. “Interpretable Asset Markets?” European Economic Review, 49 (2005), 531–560.CrossRefGoogle Scholar
Bansal, R.; Tallarini, T.; and Yaron, A.. “The Return to Wealth, Asset Pricing, and the Intertemporal Elasticity of Substitution.” Working Paper (2008).Google Scholar
Bansal, R., and Yaron, A.. “Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles.” Journal of Finance, 59 (2004), 1481–1509.CrossRefGoogle Scholar
Beaver, W. H. “The Information Content of Annual Earnings Announcements.” Journal of Accounting Research, 6 (1968), 67–92.CrossRefGoogle Scholar
Beber, A., and Brandt, M. W.. “Resolving Macroeconomic Uncertainty in Stock and Bond Markets.” Review of Finance, 13 (2009), 1–45.CrossRefGoogle Scholar
Bernanke, B. S., and Kuttner, K. N.. “What Explains the Stock Market’s Reaction to Federal Reserve Policy?” Journal of Finance, 60 (2005), 1221–1257.CrossRefGoogle Scholar
Bertaut, C., and Starr-McCluer, M.. “Household Portfolios in the United States.” Federal Reserve Board Discussion Paper (2000).CrossRefGoogle Scholar
Black, F., and Scholes, M.. “The Pricing of Options and Corporate Liabilities.” Journal of Political Economy, 81 (1973), 637–654.CrossRefGoogle Scholar
Bodie, Z. “Common Stocks as a Hedge against Inflation.” Journal of Finance, 31 (1976), 459–470.CrossRefGoogle Scholar
Bomfim, A. N. “Pre-Announcement Effects, News Effects and Volatility: Monetary Policy and the Stock Market.” Journal of Banking and Finance, 27 (2003), 133–151.CrossRefGoogle Scholar
Boyd, J. H.; Hu, J.; and Jagannathan, R.. “The Stock Market’s Reaction to Unemployment News: Why Bad News Is Usually Good for Stocks.” Journal of Finance, 60 (2005), 649–672.CrossRefGoogle Scholar
Brenner, M.; Pasquariello, P.; and Subrahmanyam, M.. “On the Volatility and Comovement of U.S. Financial Markets around Macroeconomic News Announcements.” Journal of Financial and Quantitative Analysis, 44 (2009), 1265–1289.CrossRefGoogle Scholar
Buraschi, A., and Jiltsov, A.. “Habit Formation and the Term Structure of Interest Rates.” Journal of Finance, 62 (2007), 3009–3063.CrossRefGoogle Scholar
Campbell, J. Y.; Lettau, M.; Malkiel, B. G.; and Xu, Y.. “Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk.” Journal of Finance, 56 (2001), 1–43.CrossRefGoogle Scholar
Campbell, J. Y., and Shiller, R. J.. “Stock Prices, Earnings, and Expected Dividends.” Journal of Finance, 43 (1988), 661–676.CrossRefGoogle Scholar
Campbell, J. Y.; Sunderam, A.; and Viceira, L. M.. “Inflation Bets or Deflation Hedges? The Changing Risks of Nominal Bonds.” Working Paper, Harvard University (2011).Google Scholar
Campbell, J. Y., and Viceira, L.. Strategic Asset Allocation. New York: Oxford University Press (2002).CrossRefGoogle Scholar
Campbell, J. Y., and Vuolteenaho, T.. “Inflation Illusion and Stock Prices.” American Economic Review, 94 (2004), 19–23.CrossRefGoogle Scholar
Chari, V. V.; Jagannathan, R.; and Ofer, A. R.. “Seasonalities in Security Returns: The Case of Earnings Announcements.” Journal of Financial Economics, 21 (1988), 101–121.CrossRefGoogle Scholar
Cohen, D. A.; Dey, A.; Lys, T. Z.; and Sunder, S. V.. “Earnings Announcement Premia and the Limits to Arbitrage.” Journal of Accounting and Economics, 43 (2007), 153–180.CrossRefGoogle Scholar
Cutler, D. M.; Poterba, J. M.; and Summers, L. H.. “What Moves Stock Prices?” Journal of Portfolio Management, 15 (1989), 4–12.CrossRefGoogle Scholar
Dubinsky, A., and Johannes, M.. “Earnings Announcements and Equity Options.” Working Paper, Columbia University (2005).Google Scholar
Ederington, L. H., and Lee, J. H.. “The Creation and Resolution of Market Uncertainty: The Impact of Information Releases on Implied Volatility.” Journal of Financial and Quantitative Analysis,31 (1996), 513–539.CrossRefGoogle Scholar
Fama, E. F. “Stock Returns, Real Activity, Inflation, and Money.” American Economic Review, 71 (1987), 545–565.Google Scholar
Fama, E. F., and Schwert, G. W.. “Asset Returns and Inflation.” Journal of Financial Economics,4 (1977), 115–146.CrossRefGoogle Scholar
Flannery, M. J., and Protopapadakis, A. A.. “From T-Bills to Common Stocks: Investigating the Generality of Intra-Week Return Seasonality.” Journal of Finance, 43 (1988), 431–450.Google Scholar
Flannery, M. J., and Protopapadakis, A. A.. “Macroeconomic Factors Do Influence Aggregate Stock Returns.” Review of Financial Studies, 15 (2002), 751–782.CrossRefGoogle Scholar
Fleming, M. J., and Remolona, E. M.. “What Moves the Bond Market?” Federal Reserve Bank of New York Economic Policy Review, 3 (1997), 31–50.Google Scholar
Frazzini, A., and Lamont, O.. “The Earnings Announcement Premium and Trading Volume.” NBER Working Paper 13090 (2007).Google Scholar
French, K. “Stock Returns and the Weekend Effect.” Journal of Financial Economics, 8 (1980), 55–70.CrossRefGoogle Scholar
French, K.; Leftwich, R.; and Uhrig, W.. “The Effect of Scheduled Announcements on Futures Markets.” Working Paper, University of Chicago (1989).Google Scholar
Geske, R., and Roll, R.. “The Fiscal and Monetary Linkage between Stock Returns and Inflation.” Journal of Finance, 38 (1983), 1–33.CrossRefGoogle Scholar
Gibbons, M. R., and Hess, P.. “Day of the Week Effects and Asset Returns.” Journal of Business, 54 (1981), 579–596.CrossRefGoogle Scholar
Gurkaynak, R. S.; Sack, B.; and Swanson, E.. “The Sensitivity of Long-Term Interest Rates to Economic News: Evidence and Implications for Macroeconomic Models.” American Economic Review, 95 (2005), 425–436.CrossRefGoogle Scholar
Hardouvelis, G. A. “Macroeconomic Information and Stock Prices.” Journal of Economics and Business, 39 (1987), 131–140.CrossRefGoogle Scholar
Hong, H.; Kubik, J. D.; and Stein, J. C.. “Social Interaction and Stock Market Participation.” Journal of Finance, 59 (2004), 137–163.CrossRefGoogle Scholar
Jaffe, J. F., and Mandelker, G.. “Inflation and the Holding Period Returns on Bonds.” Journal of Financial and Quantitative Analysis, 14 (1979), 959–979.CrossRefGoogle Scholar
Jones, C. M.; Lamont, O.; and Lumsdaine, R. L.. “Macroeconomic News and Bond Market Volatility.” Journal of Financial Economics, 47 (1998), 315–337.CrossRefGoogle Scholar
Kalay, A., and Loewenstein, U.. “Predictable Events and Excess Returns: The Case of Dividend Announcements.” Journal of Financial Economics, 14 (1985), 423–449.CrossRefGoogle Scholar
Knight, F. H. Risk, Uncertainty and Profit. Boston: Houghton Mifflin Co. (1921).Google Scholar
Krueger, A. B. “Do Markets Respond More to Reliable Labor Market Data? A Test of Market Rationality.” NBER Working Paper 5769 (1996).CrossRefGoogle Scholar
Kuttner, K. N. “Monetary Policy Surprises and Interest Rates: Evidence from the Fed Funds Futures Market.” Journal of Monetary Economics, 47 (2001), 523–544.CrossRefGoogle Scholar
Lakonishok, J., and Smidt, S.. “Are Seasonal Anomalies Real? A Ninety-Year Perspective.” Review of Financial Studies, 1 (1988), 403–425.CrossRefGoogle Scholar
Li, L., and Engle, R.. “Macroeconomic Announcements and Volatility of Treasury Futures.” Working Paper, University of California at San Diego (1998).Google Scholar
Mankiw, N. G., and Zeldes, S.. “The Consumption of Stockholders and Nonstockholders.” Journal of Financial Economics, 29 (1991), 97–112.CrossRefGoogle Scholar
McQueen, G., and Roley, V. V.. “Stock Prices, News, and Business Conditions.” Review of Financial Studies, 6 (1993), 683–707.CrossRefGoogle Scholar
Merton, R. C. “An Intertemporal Capital Asset Pricing Model.” Econometrica, 41 (1973), 867–887.CrossRefGoogle Scholar
Modigliani, F., and Cohn, R.. “Inflation, Rational Valuation and the Market.” Financial Analysts Journal, 37 (1979), 24–44.CrossRefGoogle Scholar
Nelson, C. R. “Inflation and Rates of Return on Common Stocks.” Journal of Finance, 31 (1976), 471–483.CrossRefGoogle Scholar
Nelson, C. R., and Schwert, G. W.. “Short-Term Interest Rates as Predictors of Inflation: On Testing the Hypothesis That the Real Rate of Interest Is Constant.” American Economic Review, 67 (1977), 478–486.Google Scholar
Newey, W. K., and West, K. D.. “A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix.” Econometrica, 55 (1987), 703–708.CrossRefGoogle Scholar
Orphanides, A. “When Good News Is Bad News: Macroeconomic News and the Stock Market.” Board of Governors of the Federal Reserve System (1992).Google Scholar
Parker, J. A. “The Consumption Risk of the Stock Market.” Brookings Papers on Economic Activity, 32 (2001), 279–348.CrossRefGoogle Scholar
Pearce, D. K., and Roley, V. V.. “The Reaction of Stock Prices to Unanticipated Changes in Money: A Note.” Journal of Finance, 38 (1983), 1323–1333.CrossRefGoogle Scholar
Pearce, D. K., and Roley, V. V.. “Stock Prices and Economic News.” Journal of Business, 58 (1985), 49–67.CrossRefGoogle Scholar
Pollet, J. M., and Wilson, M.. “Average Correlation and Stock Market Returns.” Journal of Financial Economics, 96 (2010), 364–380.CrossRefGoogle Scholar
Savor, P., and Wilson, M.. “Earnings Announcements and Systematic Risk.” Working Paper, University of Pennsylvania (2011).CrossRefGoogle Scholar
Schwert, G. W. “The Adjustment of Stock Prices to Information About Inflation.” Journal of Finance, 36 (1981), 15–29.CrossRefGoogle Scholar
Skiadas, C.“Smooth Ambiguity Aversion Toward Small Risks and Continuous-Time RecursiveUtility.” Working Paper, Northwestern University (2008).Google Scholar
Stock, J. H., and Watson, M. W.. “Why Has Inflation Become Harder to Forecast?” Journal of Money, Credit, and Banking, 39 (2007), 3–34.CrossRefGoogle Scholar
Vissing-Jorgenson, A. “Limited Asset Market Participation and the Elasticity of Intertemporal Substitution.” Journal of Political Economy, 110 (2002), 825–853.CrossRefGoogle Scholar
Wilcox, D. W. “The Construction of U.S. Consumption Data: Some Facts and Their Implications for Empirical Work.” American Economic Review, 82 (1992), 922–941.Google Scholar