A Model of the Macroeconomic Announcement Premium with Production

Posted: 28 Nov 2018

See all articles by Hengjie Ai

Hengjie Ai

University of Minnesota - Twin Cities - Carlson School of Management

Ravi Bansal

Duke University and NBER

Jay Im

Duke University - Fuqua School of Business

Chao Ying

University of Minnesota - Twin Cities, Carlson School of Management

Date Written: November 18, 2018

Abstract

Empirically, a large fraction of the market equity premium is realized on days with significant macroeconomic announcements, such as the FOMC announcements and the unemployment report. This paper presents a theory and a quantitative model for the macroeconomic announcement premium. Our model accounts for several stylized facts related to the macroeconomic announcement premium: the large equity premium realized upon announcements, the fit of CAPM model on announcement days, and the upward sloping bond announcement premium across maturities. We show that generalized risk sensitivity in preferences is key to generate announcement premiums, and our result holds in both endowment economies as well as production economies.

Keywords: announcement premium, generalized risk sensitivity, production

JEL Classification: D81, G12

Suggested Citation

Ai, Hengjie and Bansal, Ravi and Im, Jay and Ying, Chao, A Model of the Macroeconomic Announcement Premium with Production (November 18, 2018). Available at SSRN: https://ssrn.com/abstract=3286693

Hengjie Ai

University of Minnesota - Twin Cities - Carlson School of Management ( email )

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)

Jay Im

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States

Chao Ying (Contact Author)

University of Minnesota - Twin Cities, Carlson School of Management ( email )

Minneapolis, MN
United States

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