Abstract

https://ssrn.com/abstract=2843924
 


 



Risk Preferences and the Macro Announcement Premium


Hengjie Ai


University of Minnesota - Carlson School of Management

Ravi Bansal


Duke University and NBER

August 17, 2016


Abstract:     
The paper develops a theory for equity premium around macroeconomic announcements. Stock returns realized around pre-scheduled macroeconomic announcements, such as the employment report and the FOMC statements, account for 55% of the market equity premium during the 1961-2014 period, and virtually 100% of it during the later period of 1997-2014, where more announcement data are available. We provide a characterization theorem for the set of intertemporal preferences that generate a positive announcement premium. Our theory establishes that the announcement premium identifies a significant deviation from expected utility and constitutes an asset market based evidence for a large class of non-expected models that features aversion to "Knightian uncertainty", for example, Gilboa and Schmeidler (1989). We also present a dynamic model to account for the evolution of equity premium around macroeconomic announcements.

Number of Pages in PDF File: 61


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Date posted: September 27, 2016  

Suggested Citation

Ai, Hengjie and Bansal, Ravi, Risk Preferences and the Macro Announcement Premium (August 17, 2016). Available at SSRN: https://ssrn.com/abstract=2843924 or http://dx.doi.org/10.2139/ssrn.2843924

Contact Information

Hengjie Ai (Contact Author)
University of Minnesota - Carlson School of Management ( email )
321 19th Avenue South
Minneapolis, MN 55455
United States

Ravi Bansal
Duke University and NBER ( email )
Box 90120
Durham, NC 27708-0120
United States
919-660-7758 (Phone)
919-660-8038 (Fax)

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