Underreaction to Macro Announcements and the Boom and Bust of CAPM

61 Pages Posted: 14 May 2019 Last revised: 2 May 2020

See all articles by Zilong Niu

Zilong Niu

Southwestern University of Finance and Economics (SWUFE)

Date Written: August 2019

Abstract

The relationship between market beta and expected returns is positive on days with pre-scheduled macroeconomic news announcements (MNAs), but negative on the other days. This paper shows evidence that stock price underreaction to MNAs explains these phenomena. First, I use high-frequency S&P 500 futures data to identify positive (good) and negative (bad) news from macro announcements. Stocks with low sensitivities to bad macro news perform relatively well on announcement days and poorly on the following non-announcement days. Moreover, the under-performance of low sensitivity stocks is most pronounced when investor disagreement is high and short-selling constraints are binding. Subsequently, I show that the relation between market betas and returns on announcement (non-announcement) days is particularly positive (negative) among stocks with low sensitivities to bad macro news. The results are consistent with stocks, especially those with high market betas, underreact to bad news on MNA days when high shorting costs prevent prices from reflecting pessimists’ beliefs, and experience low returns on the following non-announcement days.

Keywords: Security Market Line, Underreaction, Macroeconomic News Announcement

JEL Classification: G12, G14

Suggested Citation

Niu, Zilong, Underreaction to Macro Announcements and the Boom and Bust of CAPM (August 2019). Available at SSRN: https://ssrn.com/abstract=3372359 or http://dx.doi.org/10.2139/ssrn.3372359

Zilong Niu (Contact Author)

Southwestern University of Finance and Economics (SWUFE) ( email )

55 Guanghuacun St,
Chengdu, Sichuan 610074
China

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
69
Abstract Views
547
Rank
425,395
PlumX Metrics