Premium for Heightened Uncertainty: Explaining Pre-Announcement Market Returns
65 Pages Posted: 2 Dec 2018 Last revised: 29 Jul 2021
Date Written: July 28, 2021
We find large overnight returns with no abnormal variance before nonfarm payrolls, ISM, and GDP announcements, similar to the pre-FOMC returns. To explain this common pattern, we propose a two-risk model with the uncertainty about the magnitude of the impending news' market impact as an additional risk, and link the pre-announcement return directly to the accumulation of heightened uncertainty and its later resolution prior to the announcement. We empirically test and verify the model's distinct predictions on the joint intertemporal behavior of return, variance, and particularly VIX -- a gauge of impact uncertainty by our model, surrounding macroeconomic announcements.
Keywords: Pre-Announcement Drift, Macroeconomic Announcements, FOMC, Heightened Uncertainty, VIX
JEL Classification: G12, G14
Suggested Citation: Suggested Citation