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Macro Announcement Premium and Risk Preferences

Author

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  • Ravi Bansal

    (Duke University)

  • Hengjie Ai

    (University of Minnesota)

Abstract

Empirical evidence shows that a large fraction of equity premium is realized on a relatively small number of trading days with significant macroeconomic news announcements. In the 1961-2014 period, for example, about 55% of the entire equity premium is earned on about 30 trading days per year with significant macroeconomic announcements. In addition, the market equity premium typically rises prior to the announcement and falls immediately afterwards. In this paper, we develop an abstract theory and a quantitative model for the equity premium associated with macroeconomic news announcements. We demonstrate that the announcement premium identifies the compensation for investors’ uncertainty aversion on capital markets. We present a dynamic model to account for the evolution of equity premium around macroeconomic announcements.

Suggested Citation

  • Ravi Bansal & Hengjie Ai, 2016. "Macro Announcement Premium and Risk Preferences," 2016 Meeting Papers 715, Society for Economic Dynamics.
    • Handle: RePEc:red:sed016:715
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    Cited by:

    1. Anisha Ghosh & George M. Constantinides, 2017. "What Information Drives Asset Prices?," NBER Working Papers 23689, National Bureau of Economic Research, Inc.
    2. Borisenko, Dmitry & Pozdeev, Igor, 2017. "Monetary Policy and Currency Returns: the Foresight Saga," Working Papers on Finance 1708, University of St. Gallen, School of Finance, revised 1710.
    3. Anthony M. Diercks & William Waller, 2017. "Taxes and the Fed : Theory and Evidence from Equities," Finance and Economics Discussion Series 2017-104, Board of Governors of the Federal Reserve System (U.S.).
    4. Zura Kakushadze & Juan Andrés Serur, 2018. "151 Trading Strategies," Springer Books, Springer, number 978-3-030-02792-6, September.

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