The Price of Macroeconomic Announcement News
30 Pages Posted: 25 Mar 2010 Last revised: 29 Nov 2013
Date Written: December 2, 2010
Abstract
We show that news on the state of the economy released via scheduled macroeconomic announcements changes the risk-return relation for stocks. Consistent with the predictions from theory, macroeconomic announcement news commands an asymmetric premium, which depends on the state of the economy. First, macroeconomic news constitutes priced risk which is not captured by the market, size, value or momentum factors. For example, exposure to news on higher output is rewarded with a annualized price of risk of 2.832% during expansions and an annualized price of risk of -7.008% during contractions. Simultaneously, the occurrence of macroeconomic news events changes the rewards investors require for holding the market, size, value and momentum factors. Our results explain that average returns are different on macroeconomic announcement days and show that, when news on the state of the economy is released, stock returns are driven by fundamental risks.
Keywords: E44, G12, G14
JEL Classification: Economic risk premia, macroeconomic announcements, factor pricing
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