Working Paper: NBER ID: w24432
Authors: Jessica A. Wachter; Yicheng Zhu
Abstract: Empirical studies demonstrate striking patterns in stock market returns in relation to scheduled macroeconomic announcements. First, a large proportion of the total equity premium is realized on days with macroeconomic announcements, despite the small number of such days. Second, the relation between market betas and expected returns is far stronger on announcement days as compared with non-announcement days. Third, risk as measured by volatilities and betas is equal on both types of days. We present a model with rare events that jointly explains these phenomena. In our model, which is solved in closed form, agents learn about a latent disaster probability from scheduled announcements. We quantitatively account for the empirical findings, along with other facts about the market portfolio.
Keywords: No keywords provided
JEL Codes: G11; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| macroeconomic announcements (E60) | increased expected returns (G19) |
| announcement days (G14) | stronger relationship between market betas and expected returns (G17) |
| macroeconomic announcements (E60) | affects investor expectations (D84) |
| announcement days (G14) | unique risk profile (G22) |
| latent disaster probabilities (C41) | alters risk-return dynamics (G11) |