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

Published online by Cambridge University Press:  05 April 2013

Pavel Savor  and
Mungo Wilson
Pavel Savor
Affiliation:
pavel.savor@temple.edu, Fox School of Business, Temple University, 1801 Liacouras Walk, Philadelphia, PA 19122, and Oxford-Man Institute
Mungo Wilson
Affiliation:
mungo.wilson@sbs.ox.ac.uk, Said Business School, Oxford University, Park End St, Oxford OX1 1HP, United Kingdom, and Oxford-Man Institute.
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Abstract

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.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 48 , Issue 2 , April 2013 , pp. 343 - 375
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2013 

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