Information Acquisition and the Pre-Announcement Drift

Abstract

We present a dynamic Grossman-Stiglitz model with endogenous information acquisition to explain the pre-FOMC announcement drift. Because FOMC announcements reveal substantial information about the economy, investors' incentives to acquire information are particularly strong days ahead of the announcements. Information acquisition partially resolves the uncertainty for uninformed traders. Under generalized risk sensitive preferences (Ai and Bansal, 2018), resolution of uncertainty is associated with realizations of risk premium, generating a pre-FOMC announcement drift. Because our theory does not rely on leakage of information, it can simultaneously explain the high average return and the low realized volatility during the pre-FOMC announcement period.

Keywords: Macroeconomic Announcement Premium, Pre-FOMC Announcement Drift, Asymmetric Information, Ambiguity.

JEL Classification: D83, D84, G11, G12, G14