Stock returns on post macroeconomic announcement days

Abstract

We document that on days following bad macroeconomic news, the stock market continues to decline, and the security market line has a significantly negative slope. We find weak evidence of return continuation after good macroeconomic news. These findings indicate that the market underreacts to bad news on the announcement day. The underreaction is stronger when intermediary capital is scarce and among stocks with tighter short-selling constraints, consistent with the theory of limits to arbitrage. This asymmetry in the initial market reaction to news inflates the announcement premium. Using a longer window to measure announcement returns results in insignificant announcement premium.

Keywords: Stock market return, Macroeconomic news announcement, Underreaction, Limits of arbitrage, Short-selling constraints

JEL Classification: G12, G14, E00