How Much Do Investors Care About Macroeconomic Risk? Evidence from Scheduled Economic Announcements
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What they found
The authors compared U.S. stock returns on days with scheduled announcements of inflation, unemployment, or FOMC decisions with returns on all other days, from 1958 to 2009. Average excess stock returns on announcement days were about 11 basis points versus about 1 basis point on other days, so a large share of the total equity premium was earned on roughly 40 days a year. Treasury bonds showed the same pattern. The higher returns were not matched by proportionally higher volatility, so the Sharpe ratio on announcement days was far higher, consistent with investors demanding a premium for bearing macro news risk.
What you can use
- A large fraction of the stock market's long-run return has been earned on the handful of days each year with major macro announcements.
- Being out of the market on FOMC and jobs-report days to 'avoid volatility' has historically forfeited much of the equity premium.
- The risk-reward on announcement days is unusually favorable, which is the opposite of the intuition that news days are dangerous.
Caveats
Averages over five decades; individual announcement days can be violently negative. The pattern is about holding through announcements, not trading them.
Tags: macro, announcements, equity-premium, fomc
Summaries are our own reading of the paper, not the authors' words. Educational only, not advice. Discuss it in Book Club.