Stock returns on post macroeconomic announcement days

41 Pages Posted: 16 Dec 2019 Last revised: 19 Oct 2022

See all articles by Zilong Niu

Zilong Niu

Southwestern University of Finance and Economics (SWUFE)

Terry Zhang

Australian National University (ANU)

Date Written: March 24, 2021

Abstract

We document that on days following bad macroeconomic news, the stock market continues to decline, and the security market line has a significantly negative slope. We find weak evidence of return continuation after good macroeconomic news. These findings indicate that the market underreacts to bad news on the announcement day. The underreaction is stronger when intermediary capital is scarce and among stocks with tighter short-selling constraints, consistent with the theory of limits to arbitrage. This asymmetry in the initial market reaction to news inflates the announcement premium. Using a longer window to measure announcement returns results in insignificant announcement premium.

Keywords: Stock market return, Macroeconomic news announcement, Underreaction, Limits of arbitrage, Short-selling constraints

JEL Classification: G12, G14, E00

Suggested Citation

Niu, Zilong and Zhang, Terry, Stock returns on post macroeconomic announcement days (March 24, 2021). Available at SSRN: https://ssrn.com/abstract=3495741 or http://dx.doi.org/10.2139/ssrn.3495741

Zilong Niu

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

55 Guanghuacun St,
Chengdu, Sichuan 610074
China

Terry Zhang (Contact Author)

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601
Australia

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