Equity Premium Events

71 Pages Posted: 8 Apr 2024 Last revised: 18 May 2024

See all articles by Benjamin Knox

Benjamin Knox

Board of Governors of the Federal Reserve System

Juan M. Londono

Board of Governors of the Federal Reserve System

Mehrdad Samadi

Board of Governors of the Federal Reserve System

Annette Vissing-Jorgensen

Board of Governors of the Federal Reserve System

Date Written: February 26, 2024

Abstract

We develop a methodology to determine which days are “equity premium events”: events with significantly elevated equity premia relative to the daily equity term structure. To do so, we use recently available daily S&P 500 option expirations and forward analogs of the Martin (2017) and Tetlock (2023) measures of the equity premium. We use a data-driven approach to identify events that are significantly priced by equity markets without taking a stance on what those events are. Important events include a variety of economic and political events. In the cross-section of macroeconomic releases, FOMC, CPI, and nonfarm payrolls have the largest abnormal equity premia, which increase substantially between June 2022 and June 2023. However, the elevated equity premia on macroeconomic release days are quantitatively far from explaining the large realized excess returns documented in previous work, suggesting a role for unexpectedly good news. To provide intuition for the variation in event equity premia across announcement types and time, we propose an asset pricing framework that decomposes the equity premium for a given macroeconomic release into components due to news variance and the sensitivities of the stock market and the SDF to the news released.

Keywords: Risk Premium, Macroeconomic Releases, FOMC, Daily Expiration Options

JEL Classification: E44, G12, G13

Suggested Citation

Knox, Benjamin and Londono, Juan M. and Samadi, Mehrdad and Vissing-Jorgensen, Annette, Equity Premium Events (February 26, 2024). Available at SSRN: https://ssrn.com/abstract=4773692 or http://dx.doi.org/10.2139/ssrn.4773692

Benjamin Knox

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Juan M. Londono

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Mehrdad Samadi (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Annette Vissing-Jorgensen

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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