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Risk Preferences and The Macro Announcement Premium

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  • Hengjie Ai
  • Ravi Bansal

Abstract

The paper develops a theory for 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 during the 1961-2014 period, and virtually 100% of it during the later period of 1997-2014, where more announcement data are available. We provide a characterization theorem for the set of intertemporal preferences that generate a positive announcement premium. Our theory establishes that the announcement premium identifies a significant deviation from expected utility and constitutes an asset market based evidence for a large class of non-expected models that features aversion to ”Knightian uncertainty”, for example, Gilboa and Schmeidler [30]. We also present a dynamic model to account for the evolution of equity premium around macroeconomic announcements.

Suggested Citation

  • Hengjie Ai & Ravi Bansal, 2016. "Risk Preferences and The Macro Announcement Premium," NBER Working Papers 22527, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:22527
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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 (US).
    4. Croce, Mariano Massimiliano & Marchuk, Tatyana & Schlag, Christian, 2018. "The Leading Premium," CEPR Discussion Papers 12631, C.E.P.R. Discussion Papers.

    More about this item

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • G0 - Financial Economics - - General
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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