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

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. basis points versus 1.1 basis points 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 ten 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-o¤ between macroeconomic risk and asset returns, and provide an estimate of the premium investors demand to bear this risk. Disciplines Finance and Financial Management | Management Sciences and Quantitative Methods2

FOMC Announcements and Predictable Returns

“…The results in Table 1 extend the evidence documented by Savor and Wilson (2013) and Lucca and Moench (2014). In both studies, the authors examine whether the information contained in announcements affects the market returns on FOMC days by controlling for the surprises in time-series regressions of the market returns on indicators for FOMC days.…”

“…The table re-ports results from time-series regressions of daily market excess returns on a constant and indicators for different types of FOMC days. The first specification closely resembles the result documented in Savor and Wilson (2013). On days with scheduled FOMC meetings, the market excess returns are 20 basis points higher than on all other days.…”

“…There are now a number of puzzling findings related to the Fed's influence on asset prices. Savor and Wilson (2013) report that over 60% of the equity premium since 1958 is earned on days with scheduled Federal Open Market Committee (FOMC) meetings, inflation or unemployment announcements. Similarly, Savor and Wilson (2014) show the Capital Asset Pricing Model (CAPM) prices assets surprisingly well on such days, but it fails on all other days.…”

The European Central Bank’s Minimum Bid Rate and Its Effect on Major Currency Pairs

“…Major news announcements made by the Central banks of various nations or policy changes affecting the inflation rates and other economic parameters would have a significant impact on the financial markets. Savor and [6] observed that the average returns of the US financial stock markets were performing higher on those days where macroeconomic variables were declared to the public. These factors include consumer price index, employment rate and statistics, decisions made by Federal committee on financial markets among others.…”

The Cost of New Information ECB Macro Announcement Impacts on Bid-Ask Spreads of European Blue Chips

“…Jubinski and Tomljanovich (2013) and Savor and Wilson (2013), for example, examine return effects due to macro impacts, but to the best of our knowledge there is no study directly investigating the consequences of ECB announcements on the bid-ask spread using intraday data. Considering the 4 effects of major announcements as highly important in the context of stock market pricing, we analyze the impact of both interest rate decisions and press conferences by the ECB.…”