Information Acquisition, Uncertainty Reduction, and Pre-Announcement Premium in China

Abstract

We examine the stock market returns in an environment in which the dates of the central bank’s information supply through public announcements are not prescheduled. We document that positive excess returns are accumulated as early as three days before China’s central bank releases the monthly data of monetary aggregates, which may be announced either early or late in a month. In particular, this pre-announcement premium exists only when an announcement arrives late in an announcement cycle. We provide a theoretical framework in which the degree of information acquisition in the market increases as the date approaches the end of an announcement cycle while investors are still waiting for the arrival of an announcement, a hypothesis that receives strong empirical support. We show that the information acquisition channel highlighted in Ai, Bansal, and Han (2022) explains the uncertainty reduction and the positive risk premium before monetary announcements in China.

Premium for heightened uncertainty: Explaining pre-announcement market returns

“…Therefore, a key contribution of ours is the explicit modeling of the pre-announcement period through the lens of impact uncertainty and the empirical 7 See also Gilbert, Kurov, and Wolfe (2018) and Lucca and Moench (2018). Brusa, Savor, and Wilson (2020) and Guo, Jia, and Sun (2019) have examined pre-announcement returns for other major central banks' monetary policy decisions and found mixed results. For a set of non-FOMC macroeconomic announcements, Ai and Bansal (2018) also report positive announcement-day returns when pooling together the pre-and post-announcement returns, without separating them.…”

Identifying the Effects of Macroeconomic Attention Through Foreign Investor Distraction

“…Given that these abnormal stock reactions are generally observed to occur within 3 days of an upcoming news release (Bomfim (2003), Lucca and Moench (2015), and Guo et al (2020)) which directly coincides with when attention proxies begin to rise (Fisher et al (2022)), I focus on the effect of mean foreign attention 24 Although the distinction between the behavior of retail and institutional investors is somewhat muddled since international funds often cater to the whims of their shareholders (Gelos (2011)) and institutional investors are also prone to distraction (Schmidt (2019)), it is still conceivable that the informational benefits provided by mutual funds and ETF's may help attenuate distraction effects. 25 Exposure to international funds is defined as the correlation between balance of payment equity flows and EPFR Global fund flows, which capture flows from mutual funds and ETF's into emerging markets.…”

“…More recent efforts have turned to Google search volume as a more direct proxy for attention, starting with Da, Engelberg, and Gao (2011). Of particular relevance to this study are papers measuring attention around prescheduled macroeconomic announcements (Wohlfarth (2018), Boguth, Gregoire, and Martineau (2019), Guo, Gia, andSun (2020), andFisher, Martineau, andSheng (2022)), often with the objective of testing explanations for the preannouncement premium documented by Lucca and Moench (2015). Perhaps the most formidable obstacle facing these studies is how to disentangle the aforementioned 2-way direction of causality between risk and information gathering.…”

“…Moreover, by analyzing search variation within the same country, they are unable to match regional variation in search volume data with regional variation in asset holding data, something that is possible on the international level with the CPIS. 6 4 One paper that does attempt to isolate exogenous variation in attention around monetary announcements is Guo et al (2020), who exploit the "quasi-scheduled" nature of select Chinese monetary aggregate announcements. Like Guo et al (2020), I also find that the size of the preannouncement premium is positively correlated with uncertainty reduction.…”

“…6 4 One paper that does attempt to isolate exogenous variation in attention around monetary announcements is Guo et al (2020), who exploit the "quasi-scheduled" nature of select Chinese monetary aggregate announcements. Like Guo et al (2020), I also find that the size of the preannouncement premium is positively correlated with uncertainty reduction. However, the foreign investor distraction instrumental variable strategy used here can be applied to many countries and is not sensitive to the specific conditions unique to their quasi-experimental setting.…”