More Than 100% of the Equity Premium: How Much Is Really Earned on Macroeconomic Announcement Days?

52 Pages Posted: 28 Oct 2019

See all articles by Rory Ernst

Rory Ernst

University of Washington - Michael G. Foster School of Business

Thomas Gilbert

University of Washington - Department of Finance and Business Economics

Christopher M. Hrdlicka

University of Washington - Michael G. Foster School of Business

Date Written: October 13, 2019

Abstract

One can earn well over 100% of the equity risk premium on macroeconomic announcement days identified by the prior literature. This is a robust phenomenon present across many other subsets of macroeconomic variables. We show how inadvertent sample selection along with the timing of macroeconomic announcements throughout the month produces this too-much-return puzzle. Looking at the entire distribution of macroeconomic variables eliminates this sample selection bias, while including day-of-the-month fixed effects controls for the announcement timing. We find that expected macroeconomic announcements as a whole are responsible for about half of the equity premium. This smaller premium earned over more days means Sharpe ratios are similar on announcement and non-announcement days. We also show that the fit of the CAPM on macroeconomic announcement days is not evidence that those days are special, but only a by-product of those days' high ex-post market returns.

Keywords: macroeconomic announcements, equity premium, FOMC, information, news

JEL Classification: G14

Suggested Citation

Ernst, Rory and Gilbert, Thomas and Hrdlicka, Christopher M., More Than 100% of the Equity Premium: How Much Is Really Earned on Macroeconomic Announcement Days? (October 13, 2019). Available at SSRN: https://ssrn.com/abstract=3469703 or http://dx.doi.org/10.2139/ssrn.3469703

Rory Ernst

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

Thomas Gilbert (Contact Author)

University of Washington - Department of Finance and Business Economics ( email )

Box 353200
Seattle, WA 98195
United States
206-616-7184 (Phone)

HOME PAGE: http://faculty.washington.edu/gilbertt/

Christopher M. Hrdlicka

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195
United States
206.616.0332 (Phone)
206.542.7472 (Fax)

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