Pavel G. Savor

How Much Do Investors Care About Macroeconomic Risk? Evidence From Scheduled Economic Announcements

Stock market average returns and Sharpe ratios are significantly higher on days when important macroeconomic news about inflation, unemployment, or interest rates is scheduled for announcement. The average announcement day excess return from 1958 to 2009 is 11.4 basis points versus 1.1 basis points for all the other days, suggesting that over 60% of the cumulative annual equity risk premium is earned on announcement days. The Sharpe ratio is ten times higher. In contrast, the risk-free rate is detectably lower on announcement days, consistent with a precautionary saving motive. Our results demonstrate a trade-off between macroeconomic risk and asset returns, and provide an estimate of the premium investors demand to bear this risk.

One Central Bank to Rule Them All

Both U.S. and international stock markets enjoy high returns and Sharpe ratios on days of scheduled FOMC meetings, consistent with global investors demanding a premium to bear risks associated with Federal Reserve decisions. There is no comparable result for other major central banks, whose announcements do not command positive risk premia either globally or, more surprisingly, domestically. Other macroeconomic announcements have impact on local stock markets and, to some extent, even on the U.S. market. These findings suggest that the Federal Reserve exerts a unique impact on global equity prices that does not simply stem from the size and importance of the U.S. economy.

Asset Returns and Scheduled Macroeconomic News Announcements

Stock market excess returns are significantly higher on days when the government is scheduled to announce inflation statistics, unemployment statistics, and interest rate decisions. The average announcement day excess return from 1958 to 2007 is 10.6 basis points versus 1.4 basis points for all the other days. In contrast, the risk-free rate (measured as the daily return on a 30-day T-bill) is detectably lower on announcement days, consistent with a precautionary saving motive. We show that a simple equilibrium model with deterministically varying aggregate risk can generate higher risk premia and lower risk-free rates around announcements. Our results demonstrate the required trade-off between macroeconomic risk and financial asset returns.