Risk Preferences and the Macro Announcement Premium

Abstract

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One Central Bank to Rule Them All*

“…If FOMC decisions sometimes leak out before they are announced, this would a¤ect the exact timing of any risk premium's realization. For example, Ai and Bansal (2018) develop a revealed preference theory for the macroeconomic announcement premium (Savor and Wilson (2013)), and show that in the presence of potential information leakage we would observe a pre-announcement positive drift that depends on the risk associated with the a¤ected announcement. In other words, if the content of an announcement is sometimes observed before the actual announcement, the risk premium would also be partially realized before the announcement.…”

What Information Drives Asset Prices?

“…Labor market variables, including the change in average hourly earnings and average hours of production in private non-farm payrolls in different sectors, constitute the second category of macroeconomic variables most correlated with the price-dividend ratio. These are also the two classes of macroeconomic variables that, according to FactSet, Bloomberg users pay the most attention to (see, Ai and Bansal (2016)). However, there is some variability in the correlations between the price-dividend ratio and these macroeconomic variables across subperiods, with the correlations flipping signs in certain subperiods.…”

“…The paper draws on several strands of the literature. It draws on the extant literature that focuses on learning about latent states or a single parameter as in Ai (2010), Ai and Bansal (2016), Shaliastovich (2011), Croce, Lettau, and, Drechsler (2013), Li (2005, Lettau, Ludvigson, and Wachter (2008), Nieuwerburgh and Veldkamp ( 2006)), and Veronesi (2000). Pastor and Veronesi (2009) review learning models.…”

What Information Drives Asset Prices?

“…Labor market variables, including the change in average hourly earnings and average hours of production in 4 private non-farm payrolls in different sectors, constitute the second category of macroeconomic variables most correlated with the price-dividend ratio. These are also the two classes of macroeconomic variables that, according to FactSet, Bloomberg users pay the most attention to (see, Ai and Bansal (2016)). However, there is some variability in the correlations between the price-dividend ratio and these macroeconomic variables across subperiods, with the correlations flipping signs in certain subperiods.…”

“…The paper draws on several strands of the literature. It draws on the extant literature that focuses on learning about latent states or a single parameter as in Ai (2010), Ai and Bansal (2016), Bansal and Shaliastovich (2011), Croce, Lettau, and Ludvigson (2015), Drechsler (2013), Li (2005, Lettau, Ludvigson, and Wachter (2008), Nieuwerburgh and Veldkamp (2006)), and Veronesi (2000). Pastor and Veronesi (2009) review learning models.…”