How Much Do Investors Care About Macroeconomic Risk? Evidence from Scheduled Economic Announcements
62 Pages Posted: 8 Dec 2008 Last revised: 21 Apr 2014
Date Written: November 28, 2011
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 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-off between macroeconomic risk and asset returns, and provide an estimate of the premium investors demand to bear this risk.
Keywords: Asset Pricing, Macroeconomic Risk, Macroeconomic News
JEL Classification: G12
Suggested Citation: Suggested Citation