Premium for heightened uncertainty: Explaining pre-announcement market returns

Grace Xing Hu, Jun Pan, Jiang Wang and Haoxiang Zhu

Journal of Financial Economics, 2022, vol. 145, issue 3, 909-936

Abstract: We find large overnight returns with no abnormal variance before nonfarm payrolls, ISM, and GDP announcements, 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: Pre-Announcement drift; Macroeconomic announcements; FOMC; Heightened uncertainty; VIX (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (8)

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Working Paper: Premium for Heightened Uncertainty: Explaining Pre-Announcement Market Returns (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:145:y:2022:i:3:p:909-936

DOI: 10.1016/j.jfineco.2021.09.015

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