Econometrica Vol. 86 No. 4 2018
Risk Preferences and the Macroeconomic Announcement Premium
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.
- DOI
- 10.3982/ecta14607
- Volume
- 86
- Issue
- 4
- Pages
- 1383-1430
- Language
- en
- Sources
- crossref openalex bibtex:phds-export.bib