Working Paper: NBER ID: w22527
Authors: 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.
Keywords: Equity Premium; Macroeconomic Announcements; Risk Preferences; Nonexpected Utility
JEL Codes: E0; G0; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| macroeconomic announcements (E60) | equity premium (G12) |
| resolution of uncertainty associated with announcements (D84) | equity premium (G12) |
| investors' intertemporal preferences (D15) | announcement premium (Y20) |
| announcement premium (Y20) | asset pricing (G19) |
| equity premium peaks at announcement (G14) | equity premium decreases thereafter (G12) |