Macro Announcement Premium and Risk Preferences

Ravi Bansal and Hengjie Ai
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Hengjie Ai: University of Minnesota

No 715, 2016 Meeting Papers from Society for Economic Dynamics

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.

Date: 2016
New Economics Papers: this item is included in nep-sog and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed016:715

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