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How Much Do Investors Care About Macroeconomic Risk? Evidence from Scheduled Economic Announcements

  • Savor, Pavel
  • Wilson, Mungo

Stock market average returns and Sharpe ratios are significantly higher on days when important macroeconomic news about inflation, unemployment, or interest rates is scheduled for announcement. The average announcement-day excess return from 1958 to 2009 is 11.4 basis points (bp) versus 1.1 bp for all the other days, suggesting that over 60% of the cumulative annual equity risk premium is earned on announcement days. The Sharpe ratio is 10 times higher. In contrast, the risk-free rate is detectably lower on announcement days, consistent with a precautionary saving motive. Our results demonstrate a trade-off between macroeconomic risk and asset returns, and provide an estimate of the premium investors demand to bear this risk.

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Article provided by Cambridge University Press in its journal Journal of Financial and Quantitative Analysis.

Volume (Year): 48 (2013)
Issue (Month): 02 (April)
Pages: 343-375

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Handle: RePEc:cup:jfinqa:v:48:y:2013:i:02:p:343-375_00
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