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

The Pre‐FOMC Announcement Drift

“…()). More closely related to our paper, Jones, Lamont, and Lumsdaine () study unconditional fixed income returns around macroeconomic releases (inflation and labor market), and Savor and Wilson () find positive excess equity returns on days of inflation, labor market, and FOMC releases from 1958 to 2009. Our paper differs from the latter study because we examine returns ahead of scheduled announcements while they look at unconditional returns on announcement days.…”

“…Because there are no FOMC announcements prior to 1994, our samples do not overlap in this period because we study close‐to‐close returns on days of scheduled FOMC meetings. On the other hand, Savor and Wilson () focus on returns earned on the day after, which is generally when investors would have learned about the policy actions. We characterize excess returns in the 10‐day window centered around FOMC meeting days in Section .C.…”

The impact of ECB macro-announcements on bid–ask spreads of European blue chips

“…Unfortunately we do not have data on individual inventory positions so we cannot prove this assumption straight forward but we can shed light on this point by the following argumentation. Savor and Wilson (2013) find that, net of the new information conveyed in announcements, the average price is higher after announcements than before, so there is a risk premium for holding stocks over the announcement period. Considering the theories about efficient markets and the arbitrage pricing theory this is reasonable, since higher risk-taking must be rewarded by higher 11 See internet resources for Bloomberg News survey results concerning the ECB decision forecasts, for example Black and Thesing (2012); Black and Thesing (2013); Bloomberg.com (2012); Riecher (2012); Riecher (2013).…”

“…Thus, ECB announcements have a special character that has an 14 Savor and Wilson (2013) use daily data, but our intraday discussion can also hold for daily data if market makers already start their inventory adjustment process one day in advance. 15 See Black and Randow (2012) and Black and Thesing (2012) for the survey information.…”

What determines the stock market's reaction to monetary policy statements?

“…They also find higher average bond returns on announcement days, implying the presence of an announcement risk premium. Savor and Wilson (in press) find evidence of an announcement risk premium in the stock market. Our contribution to this literature is to examine the effect of monetary policy statements on stock and bond return volatility and to provide evidence that macroeconomic risk associated with such statements increases in recessions, leading to higher expected stock returns on announcement days.…”