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.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 1383-1430 |
| Number of pages | 48 |
| Journal | Econometrica |
| Volume | 86 |
| Issue number | 4 |
| DOIs | |
| State | Published - 2018 |
Bibliographical note
Publisher Copyright:© 2018 The Econometric Society
Keywords
- Equity premium
- Knightian uncertainty
- announcement
- robustness