The macroeconomic announcement premium refers to the phenomenon where financial markets, particularly stock and bond markets, experience higher-than-usual returns on days when significant macroeconomic announcements are made. The premium represents the additional returns investors may receive due to increased trading activity, market reactions, or adjustments to expectations following these announcements. Markets tend to experience greater volatility or price changes on these days as new information about the economy is revealed, influencing investor sentiment and asset prices.
Reference [1] studied the dynamics of high-beta stock returns around macroeconomic announcements. The authors pointed out,
Stocks in the top beta-decile earn an average excess return of −0.075% on days before announcements, 0.164% on announcement days, and −0.093% on days after announcements. More importantly, driven by high-beta stock returns, beta premium experiences a significant swing around the announcement.
The authors also designed a trading strategy based on these observations and investigated the reasons behind the abnormal return.
Since macroeconomic announcements are pre-scheduled, the above finding implies that a feasible long-short strategy of betting against beta (BAB) on days before and after announcements and betting on beta (BOB) on announcement days yields an annualized 25.28% return…
We examine alternative hypotheses for the variation of high-beta stock returns around macroeconomic announcements. Specifically, we find that the liquidity effect is only consistent with pre-announcement high-beta stock returns, whereas risk exhibits a consistent but rather weak pattern around the announcement. In comparison, trading volume exhibits consistent patterns as stock returns across beta portfolios around the announcements. Moreover, shifts in investor risk aversion have a significant explanatory power for the variation of beta return spread around the announcement. Nevertheless, our results show that changes in liquidity, risk, and investor risk appetite around the announcements at best partially account for variations in high-beta stock returns. The finding of our study highlights the dynamic effect of macroeconomic announcements on asset prices and adds further to the puzzle of the effect of macroeconomic announcements.
In short, a profitable trading strategy was developed to take advantage of the macroeconomic announcement premium. A partial explanation for the excess return is attributed to changes in liquidity, risk, and investor risk appetite around the announcements.
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References
[1] Jingjing Chen, George J. Jiang, High-beta stock valuation around macroeconomic announcements, Financial Review. 2024;1–26.
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