Information Acquisition and the Pre-Announcement Drift

48 Pages Posted: 18 Nov 2021 Last revised: 29 Nov 2021

See all articles by Hengjie Ai

Hengjie Ai

University of Minnesota - Carlson School of Management; affiliation not provided to SSRN

Ravi Bansal

Duke University and NBER

Leyla Jianyu Han

Boston University - Questrom School of Business

Date Written: November 13, 2021

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, and under generalized risk sensitive preferences (Ai and Bansal, 2018), lower the discount rate and results in a stock market run-up. Because our theory does not rely on the leakage of information, it can simultaneously explain the low realized volatility during the pre-FOMC announcement period and the lack of a positive correlation between pre-and post-announcement returns.

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

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

Suggested Citation

Ai, Hengjie and Bansal, Ravi and Han, Leyla Jianyu, Information Acquisition and the Pre-Announcement Drift (November 13, 2021). Available at SSRN: https://ssrn.com/abstract=3964349 or http://dx.doi.org/10.2139/ssrn.3964349

Hengjie Ai

University of Minnesota - Carlson School of Management ( email )

321 19th Avenue South
Minneapolis, MN 55455
United States

HOME PAGE: http://https://www.hengjieai.com/

affiliation not provided to SSRN

Ravi Bansal

Duke University and NBER ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7758 (Phone)
919-660-8038 (Fax)

Leyla Jianyu Han (Contact Author)

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States

HOME PAGE: http://www.leylahan.com/

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