Asset Pricing Around Anticipated Announcements: A Swing of Two Days

Primary author: Jingjing Chen
Faculty sponsor: George Jiang

Primary college/unit: Carson College of Business
Campus: Pullman

Abstract:

The literature documents that on days with pre-scheduled macroeconomic news announcement, the market earns significantly higher returns. Consistently, the literature documents a significantly positive implied market premium on these days, i.e., the market significantly prices beta across stocks. In this study, I show that over the two-day announcement window [-1, 0], the average market excess return is no longer significantly higher and the implied market premium is no longer significant. Both sets of results suggest that on days prior to the announcement, stocks earn relatively lower returns. I interpret this episode as evidence that investors price assets at a discount prior to anticipated announcements due to information uncertainty, but price assets with a premium post-announcement as a result of uncertainty resolution. I show both cross-sectional and time-series evidence to corroborate our argument. Specifically, I show that the discount is more pronounced for stocks with high information uncertainty and high illiquidity, and the premium is accrued more quickly for stocks with low information uncertainty and low illiquidity. Over time, the discount and premium associated with pre-scheduled macroeconomic news announcement are higher when market uncertainty is high and investor sentiment is low.