Information Content Drives Risk Premium of Macroeconomic News on Bond and Stock Markets
University of Cologne - Cologne Graduate School in Management, Economics and Social Sciences
University of Cologne - Department of Corporate Finance; University of Cologne - Centre for Financial Research (CFR)
July 20, 2012
We show that both stocks and bonds earn substantial excess returns on days when macroeconomic reports are released. However, stocks and bonds award their risk premia on different announcement days. Stock investors earn a risk premium only on days when news about GDP growth is released whereas bond investors are compensated only for bearing the risk of inflation related news. Stock holders earn more than 5% on growth related announcement days. In fact, other trading days do not earn a positive risk premium on stock markets during our sample period 1985 to 2009. On long-term bond markets, over three percent per year are earned on inflation related announcement days, i.e., 45% of the annual risk premium. Our findings have implications for, e.g., asset allocation as they suggest that investors resort to market timing strategies, i.e., they bring forward or delay market entries in order to earn the risk premium.
Keywords: Asset Pricing, Risk Premium, Macroeconomic News
JEL Classification: E44, G12, G14working papers series
Date posted: July 21, 2012
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