IDEAS home Printed from https://ideas.repec.org/a/sae/sagope/v13y2023i4p21582440231218770.html
   My bibliography  Save this article

Macroeconomic Announcements: How Announcements Shape Trading Strategies

Author

Listed:
  • Qi Cui
  • Tianhong Zhao
  • Tingyue Cui

Abstract

The Capital Asset Pricing Model (CAPM) is a widely used and tractable model relating financial risk and return. However, it has been less successful when taken to the data. In their seminal paper, Frazzini and Pedersen propose a Betting Against Beta (BAB) factor to take advantage of this fact. In their construction, the BAB factor is a portfolio which longs low-beta stocks and shorts high-beta stocks. Since its construction, the BAB factor has been widely cited and used both in financial academics and in industry. This paper proposes a novel betting on and against beta (BOAB) strategy, which bets on beta on days with macroeconomic announcements and bets against beta on days without. Here, macroeconomic announcement days are defined as days when inflation, unemployment, or interest rate decisions are released. Our findings confirm the persistent positive beta-return relationship observed on macroeconomic announcement days. We show that compared to the BAB strategy, BOAB delivers higher average daily excess returns over the time period 1964 to 2021 when applied to the U.S. stock market. This outperformance of the BOAB strategy is robust to different constructions of the BAB factor and is economically and statistically significant when compared with the usual asset pricing factors such as value, size, and momentum. The outperformance of the BOAB strategy could be used to inform agents’ portfolio allocation choices. Limitations are also discussed.

Suggested Citation

  • Qi Cui & Tianhong Zhao & Tingyue Cui, 2023. "Macroeconomic Announcements: How Announcements Shape Trading Strategies," SAGE Open, , vol. 13(4), pages 21582440231, December.
    • Handle: RePEc:sae:sagope:v:13:y:2023:i:4:p:21582440231218770
    DOI: 10.1177/21582440231218770
    as

    Download full text from publisher

    File URL: https://journals.sagepub.com/doi/10.1177/21582440231218770
    Download Restriction: no
    File URL: https://libkey.io/10.1177/21582440231218770?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Kuttner, Kenneth N., 2001. "Monetary policy surprises and interest rates: Evidence from the Fed funds futures market," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 523-544, June.
    2. Azi Ben‐Rephael & Bruce I. Carlin & Zhi Da & Ryan D. Israelsen, 2021. "Information Consumption and Asset Pricing," Journal of Finance, American Finance Association, vol. 76(1), pages 357-394, February.
    3. Chan, Kam Fong & Marsh, Terry, 2022. "Asset pricing on earnings announcement days," Journal of Financial Economics, Elsevier, vol. 144(3), pages 1022-1042.
    4. Constantinos Antoniou & John A. Doukas & Avanidhar Subrahmanyam, 2016. "Investor Sentiment, Beta, and the Cost of Equity Capital," Management Science, INFORMS, vol. 62(2), pages 347-367, February.
    5. Peng, Lin & Xiong, Wei, 2006. "Investor attention, overconfidence and category learning," Journal of Financial Economics, Elsevier, vol. 80(3), pages 563-602, June.
    6. Stefano Dellavigna & Joshua M. Pollet, 2009. "Investor Inattention and Friday Earnings Announcements," Journal of Finance, American Finance Association, vol. 64(2), pages 709-749, April.
    7. Savor, Pavel & Wilson, Mungo, 2014. "Asset pricing: A tale of two days," Journal of Financial Economics, Elsevier, vol. 113(2), pages 171-201.
    8. Fama, Eugene F & French, Kenneth R, 1992. "The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    9. Lou, Dong & Polk, Christopher & Skouras, Spyros, 2019. "A tug of war: Overnight versus intraday expected returns," Journal of Financial Economics, Elsevier, vol. 134(1), pages 192-213.
    10. Savor, Pavel & Wilson, Mungo, 2013. "How Much Do Investors Care About Macroeconomic Risk? Evidence from Scheduled Economic Announcements," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 48(2), pages 343-375, April.
    11. Hendershott, Terrence & Livdan, Dmitry & Rösch, Dominik, 2020. "Asset pricing: A tale of night and day," Journal of Financial Economics, Elsevier, vol. 138(3), pages 635-662.
    12. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    13. Alan Moreira & Tyler Muir, 2017. "Volatility-Managed Portfolios," Journal of Finance, American Finance Association, vol. 72(4), pages 1611-1644, August.
    14. Tom Y. Chang & Samuel M. Hartzmark & David H. Solomon & Eugene F. Soltes, 2017. "Being Surprised by the Unsurprising: Earnings Seasonality and Stock Returns," The Review of Financial Studies, Society for Financial Studies, vol. 30(1), pages 281-323.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Chan, Kam Fong & Marsh, Terry, 2022. "Asset pricing on earnings announcement days," Journal of Financial Economics, Elsevier, vol. 144(3), pages 1022-1042.
    2. Bodilsen, Simon & Eriksen, Jonas N. & Grønborg, Niels S., 2021. "Asset pricing and FOMC press conferences," Journal of Banking & Finance, Elsevier, vol. 128(C).
    3. Insana, Alessandra, 2023. "Betting against beta with intraday and overnight signals," International Review of Financial Analysis, Elsevier, vol. 86(C).
    4. Michael Hasler & Charles Martineau, 2023. "Explaining the Failure of the Unconditional CAPM with the Conditional CAPM," Management Science, INFORMS, vol. 69(3), pages 1835-1855, March.
    5. Xin Chen & Wei He & Libin Tao & Jianfeng Yu, 2023. "Attention and Underreaction-Related Anomalies," Management Science, INFORMS, vol. 69(1), pages 636-659, January.
    6. Andreas Neuhierl & Michael Weber & Michael Weber, 2017. "Monetary Momentum," CESifo Working Paper Series 6648, CESifo.
    7. Chen, Linda H. & Jiang, George J. & Zhu, Kevin X., 2018. "Total attention: The effect of macroeconomic news on market reaction to earnings news," Journal of Banking & Finance, Elsevier, vol. 97(C), pages 142-156.
    8. Cynthia M. Gong & Di Luo & Huainan Zhao, 2021. "Liquidity risk and the beta premium," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 44(4), pages 789-814, December.
    9. Jacobs, Heiko & Weber, Martin, 2015. "On the determinants of pairs trading profitability," Journal of Financial Markets, Elsevier, vol. 23(C), pages 75-97.
    10. Adlai Fisher & Charles Martineau & Jinfei Sheng, 2022. "Macroeconomic Attention and Announcement Risk Premia," The Review of Financial Studies, Society for Financial Studies, vol. 35(11), pages 5057-5093.
    11. Maximilian Renz & Olaf Stotz, 2021. "A macroeconomic hedge portfolio and the cross section of stock returns," Review of Financial Economics, John Wiley & Sons, vol. 39(1), pages 73-94, January.
    12. Cheema, Arbab K. & Eshraghi, Arman & Wang, Qingwei, 2023. "Macroeconomic news and price synchronicity," Journal of Empirical Finance, Elsevier, vol. 73(C), pages 390-412.
    13. Insana, Alessandra, 2022. "Does systematic risk change when markets close? An analysis using stocks’ beta," Economic Modelling, Elsevier, vol. 109(C).
    14. 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.
    15. Carlos Madeira & Joao Madeira, 2015. "Dissent in FOMC Meeting and the Announcement Drift," Working Papers Central Bank of Chile 749, Central Bank of Chile.
    16. Chan, Kam Fong & Marsh, Terry, 2021. "Asset prices, midterm elections, and political uncertainty," Journal of Financial Economics, Elsevier, vol. 141(1), pages 276-296.
    17. Hirshleifer, David & Sheng, Jinfei, 2022. "Macro news and micro news: Complements or substitutes?," Journal of Financial Economics, Elsevier, vol. 145(3), pages 1006-1024.
    18. Gilbert, Thomas & Hrdlicka, Christopher & Kamara, Avraham, 2018. "The structure of information release and the factor structure of returns," Journal of Financial Economics, Elsevier, vol. 127(3), pages 546-566.
    19. Andrei, Daniel & Friedman, Henry & Ozel, N. Bugra, 2023. "Economic uncertainty and investor attention," Journal of Financial Economics, Elsevier, vol. 149(2), pages 179-217.
    20. Turan G. Bali & Robert F. Engle & Yi Tang, 2017. "Dynamic Conditional Beta Is Alive and Well in the Cross Section of Daily Stock Returns," Management Science, INFORMS, vol. 63(11), pages 3760-3779, November.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sae:sagope:v:13:y:2023:i:4:p:21582440231218770. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: SAGE Publications (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.