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Risk Preferences and the Macroeconomic Announcement Premium

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  • Hengjie Ai
  • Ravi Bansal

Abstract

This paper develops a revealed preference theory for the equity premium around macroeconomic announcements. Stock returns realized around pre‐scheduled macroeconomic announcements, such as the employment report and the FOMC statements, account for 55% of the market equity premium. We provide a characterization theorem for the set of intertemporal preferences that generates a nonnegative announcement premium. Our theory establishes that the announcement premium identifies a significant deviation from time‐separable expected utility and provides asset‐market‐based evidence for a large class of non‐expected utility models. We also provide conditions under which asset prices may rise prior to some macroeconomic announcements and exhibit a pre‐announcement drift.

Suggested Citation

  • Hengjie Ai & Ravi Bansal, 2018. "Risk Preferences and the Macroeconomic Announcement Premium," Econometrica, Econometric Society, vol. 86(4), pages 1383-1430, July.
    • Handle: RePEc:wly:emetrp:v:86:y:2018:i:4:p:1383-1430
    DOI: 10.3982/ECTA14607
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