The Macroeconomic Announcement Premium
64 Pages Posted: 30 Sep 2017 Last revised: 23 Feb 2019
Date Written: February 19, 2019
Empirical studies demonstrate striking patterns in stock market returns in relation to scheduled macroeconomic announcements. First, a large proportion of the total equity premium is realized on days with macroeconomic announcements, despite the small number of such days. Second, the relation between market betas and expected returns is far stronger on announcement days as compared with non-announcement days. Finally, these results hold for fixed-income investments as well as for stocks. We present a model with rare events that jointly explains these phenomena. In our model, which is solved in closed form, agents learn about a latent disaster probability from scheduled announcements. We quantitatively account for the empirical findings, along with other facts about the market portfolio.
Keywords: rare disasters, regime shifts, learning
JEL Classification: G11, G12
Suggested Citation: Suggested Citation