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

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

One Central Bank to Rule Them All

While global stock markets enjoy high returns on days surrounding FOMC meetings, there is no comparable result for other central banks either internationally or, more surprisingly, domestically. Neither announcement surprises nor currency moves drive these findings, which hold even for stocks with a domestic focus. The difference in announcement premia is not explained by economy size, exposure to multinationals, or policy activism. We conclude that the Fed exerts a unique impact on global equities. Consistent with this hypothesis, uncertainty drops across global markets following FOMC announcements but not those of other central banks. Furthermore, the Fed is generally the leader among central banks in setting monetary policy

Earnings Announcements and Systematic Risk

Firms enjoy high returns at times when they are scheduled to report earnings. A simple strategy that buys all announcers and short-sells all other stocks earns an annualized return of 9.9%, with a Sharpe ratio that is significantly higher than that of value and momentum strategies. Standard pricing models cannot explain this performance, with the strategy's abnormal return typically almost equal to its raw return. We propose a risk-based explanation for this phenomenon, in which investors use announcements to revise their earnings expectations for non-announcing firms, but can only do so imperfectly. Consequently, the covariance between firm-specific and market cash-flow news spikes around announcements, making announcers especially risky. Consistent with our hypothesis, we find that returns of earnings announcers robustly predict aggregate earnings growth. Furthermore, non-announcing firms respond to announcements in a manner consistent with our model, both across time and cross-sectionally. We also show that the announcement premium is extremely persistent across stocks, and that early (late) announcers earn higher (lower) returns. Finally, exposure to earnings announcement risk is priced in the cross-section

Uncertainty premia for small and large risks

We develop a model showing that the e§ect of smooth ambiguity aversion on large risks, those that are independent of the holding period, is of Örst-order importance, in contrast to risks that are proportional to the holding period. To test this hypothesis, we construct an ex-ante measure of the price of uncertainty based on changes in the option-implied concavity of preferences. As predicted by our model, we Önd that such concavity increases ahead of scheduled macroeconomic announcements, which represent large risks. We also provide an estimate of the coe¢ cient of relative ambiguity aversion and show how uncertainty varies across di§erent announcements. Our results suggest that the macroeconomic announcement premium arises at least partly because of an increase in the price of uncertainty. One implication is that a fundamental beneÖt of securities markets is that they break large risks into small ones by allowing frequent trading, thereby reducing discount rates

One central bank to rule them all

While global stock markets enjoy high returns on days surrounding FOMC meetings, there is no comparable result for other central banks either internationally or, more surprisingly, domestically. Neither announcement surprises nor currency moves drive these Öndings, which hold even for stocks with a domestic focus. The di§erence in announcement premia is not explained by economy size, exposure to multinationals, or policy activism. We conclude that the Fed exerts a unique impact on global equities. Consistent with this hypothesis, uncertainty drops across global markets following FOMC announcements but not those of other central banks. Furthermore, the Fed is generally the leader among central banks in setting monetary policy

One central bank to rule them all

While global stock markets enjoy high returns on days surrounding FOMC meetings, there is no comparable result for other central banks either internationally or, more surprisingly, domestically. Neither announcement surprises nor currency moves drive these Öndings, which hold even for stocks with a domestic focus. The di§erence in announcement premia is not explained by economy size, exposure to multinationals, or policy activism. We conclude that the Fed exerts a unique impact on global equities. Consistent with this hypothesis, uncertainty drops across global markets following FOMC announcements but not those of other central banks. Furthermore, the Fed is generally the leader among central banks in setting monetary policy