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A Model of Two Days: Discrete News and Asset Prices

Author

Listed:
  • Jessica A Wachter
  • Yicheng Zhu

Abstract

Empirical studies demonstrate striking patterns in stock returns related to scheduled macroeconomic announcements. A large proportion of the total equity premium is realized on days with macroeconomic announcements. The relation between market betas and expected returns is far stronger on announcement days as compared with nonannouncement days. Finally, these results hold for fixed-income investments as well as for stocks. We present a model in which agents learn the probability of an adverse economic state on announcement days. We show that the model quantitatively accounts for the empirical findings. Evidence from options data provides support for the model’s mechanism.

Suggested Citation

  • Jessica A Wachter & Yicheng Zhu, 2022. "A Model of Two Days: Discrete News and Asset Prices," The Review of Financial Studies, Society for Financial Studies, vol. 35(5), pages 2246-2307.
    • Handle: RePEc:oup:rfinst:v:35:y:2022:i:5:p:2246-2307.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhab080
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    Citations

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    Cited by:

    1. Juan M. Londono & Mehrdad Samadi, 2023. "The Price of Macroeconomic Uncertainty: Evidence from Daily Options," International Finance Discussion Papers 1376, Board of Governors of the Federal Reserve System (U.S.).
    2. Niu, Yingjie & Yang, Jinqiang & Zou, Zhentao, 2024. "Disaster learning and aggregate investment," Journal of Economic Theory, Elsevier, vol. 220(C).
    3. Kerssenfischer, Mark & Schmeling, Maik, 2024. "What moves markets?," Journal of Monetary Economics, Elsevier, vol. 145(C).
    4. Sonya Zhu, 2023. "Volume dynamics around FOMC announcements," BIS Working Papers 1079, Bank for International Settlements.
    5. Fousseni Chabi-Yo & Chukwuma Dim & Grigory Vilkov, 2023. "Generalized Bounds on the Conditional Expected Excess Return on Individual Stocks," Management Science, INFORMS, vol. 69(2), pages 922-939, February.
    6. Rui Guo & Dun Jia & Xi Sun, 2023. "Information Acquisition, Uncertainty Reduction, and Pre-Announcement Premium in China," Review of Finance, European Finance Association, vol. 27(3), pages 1077-1118.

    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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