Risk Preferences and The Macro Announcement Premium / Hengjie Ai, Ravi Bansal.

Format:

Book

Author/Creator:

Ai, Hengjie.

Contributor:

National Bureau of Economic Research.

Bansal, Ravi.

Series:

Working Paper Series (National Bureau of Economic Research) no. w22527.

NBER working paper series no. w22527

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2016.

Summary:

The paper develops a theory for 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 during the 1961-2014 period, and virtually 100% of it during the later period of 1997-2014, where more announcement data are available. We provide a characterization theorem for the set of intertemporal preferences that generate a positive announcement premium. Our theory establishes that the announcement premium identifies a significant deviation from expected utility and constitutes an asset market based evidence for a large class of non-expected models that features aversion to "Knightian uncertainty", for example, Gilboa and Schmeidler [30]. We also present a dynamic model to account for the evolution of equity premium around macroeconomic announcements.

Notes:

Print version record

August 2016.