Post Macroeconomic Announcement Reversal

Abstract

We document that the positive slope of the security market line on macroeconomic announcement days is reversed on two days after the announcement. On post-announcement days, stocks in the top beta decile return -5.13 basis points per day, completely erasing their gains from the announcement day. We find similar post-announcement reversal in market returns. Moreover, the reversal is predictable. If the market response on the announcement day is negative (i.e. after bad macroeconomic news), the market continues to decline by another 14 basis points and high-beta stocks lose 31 basis points on the next day. These findings suggest that the market does not immediately absorb macroeconomic news upon release and announcement-day returns may overestimate macroeconomic risk premium. We develop a model in which investors process bad news slowly. When good news is reflected in stock prices faster, unconditional returns are higher close to the announcement and, subsequently, become negative as bad news begins to dominate. Our model successfully explains the stock market behaviour on both announcement and post-announcement days.

Keywords: CAPM, Mispricing, Macroeconomic Announcement, FOMC

JEL Classification: G12, G14, E00