Investor Risk Appetite and High-Beta Stock Valuation around Macroeconomic Announcements

Abstract

We document a dramatic swing of high-beta stock returns around macroeconomic announcements – from being negative on the day before, to positive on the day of, and negative again on the day after the announcement. Driven by high-beta stock returns, beta premium and market return both experience similar swings around the announcement. A feasible long-short strategy of betting against beta (BAB) and betting on beta (BOB) yields annualized 25.28% cumulative return over the three-day announcement window. Trading activities suggest that some (institutional) investors actively trade high-beta stocks to adjust risk exposure around the announcement and are averse to risk on days before and after announcements but willing to take risk on announcement days. Options trading shows corroborating evidence that investors are more risk-averse on days before and after announcements than on announcement days. The findings shed new light on the dynamic effect of macroeconomic announcements and the impact of risk aversion on prices of high-risk assets.

Keywords: Macroeconomic announcements; High-beta stock returns; Beta premium; Market return; Risk appetite

JEL Classification: G12; G14