Working Paper: NBER ID: w25817
Authors: Grace Xing Hu; Jun Pan; Jiang Wang; Haoxiang Zhu
Abstract: We find large overnight returns, with no abnormal variance, before the release of nonfarm payrolls, ISM, and GDP, similar to the pre-FOMC returns. To explain this common pattern, we propose a two-risk model with the uncertainty about the magnitude of the impending news' market impact as an additional risk, and link the pre-announcement return directly to the accumulation of heightened uncertainty and its later resolution prior to the announcement. We empirically test and verify the model's distinct predictions on the joint intertemporal behavior of return, variance, and particularly VIX—a gauge of impact uncertainty by our model, surrounding macroeconomic announcements.
Keywords: macroeconomic announcements; market returns; uncertainty; VIX; impact uncertainty
JEL Codes: G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| heightened uncertainty (VIX) (D84) | preannouncement returns (G14) |
| VIX reduction (G19) | preannouncement returns (G14) |
| impact uncertainty (F69) | preannouncement returns (G14) |
| timing of information leakages (G14) | market returns (G19) |
| preannouncement period (G14) | return-to-variance ratio (C29) |
| postannouncement period (G14) | return-to-variance ratio (C29) |