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

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