Risk Preferences and the Macroeconomic Announcement Premium

Hengjie Ai and Ravi Bansal

Econometrica, 2018, vol. 86, issue 4, 1383-1430

Abstract: This paper develops a revealed preference theory for the 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. We provide a characterization theorem for the set of intertemporal preferences that generates a nonnegative announcement premium. Our theory establishes that the announcement premium identifies a significant deviation from time‐separable expected utility and provides asset‐market‐based evidence for a large class of non‐expected utility models. We also provide conditions under which asset prices may rise prior to some macroeconomic announcements and exhibit a pre‐announcement drift.

Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:wly:emetrp:v:86:y:2018:i:4:p:1383-1430

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