Introduction This study contribution Summary of Results Summary How Much Do Investors Care about Macroeconomic Risk ? Evidence From Scheduled Economic Announcements Pavel Savor 1 Mungo Wilson 2 1 The Wharton School, University of Pennsylvania 2 Said Business School, Oxford University Utah Winter Finance Conference, 2010 presenter: Eddie Aronovich, Tel-Aviv University, Advanced Finance course
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How Much Do Investors Care about Macroeconomic Riskpresenter: Eddie Aronovich, Tel-Aviv University, Advanced Finance course. Introduction This study contribution Summary of Results
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IntroductionThis study contribution
Summary of ResultsSummary
How Much Do Investors Care aboutMacroeconomic Risk ?
Evidence From Scheduled Economic Announcements
Pavel Savor1 Mungo Wilson2
1The Wharton School, University of Pennsylvania
2Said Business School, Oxford University
Utah Winter Finance Conference, 2010
presenter: Eddie Aronovich, Tel-Aviv University, Advanced Finance course
IntroductionThis study contribution
Summary of ResultsSummary
Outline
1 IntroductionSchrodinger’s CatIntuition and Motivation
2 This study contributionOur modelPrevious workInformation processedSimilar results
3 Summary of Results
4 Summary
presenter: Eddie Aronovich, Tel-Aviv University, Advanced Finance course
IntroductionThis study contribution
Summary of ResultsSummary
Schrodinger’s CatIntuition and Motivation
The elevator talk for this research
How does macroeconomic indicators affects asset pricesand their risk ?
Methodology: Analyze the prescheduled macroeconomicsnews announcements affects on stocks and T-bills prices
presenter: Eddie Aronovich, Tel-Aviv University, Advanced Finance course
IntroductionThis study contribution
Summary of ResultsSummary
Schrodinger’s CatIntuition and Motivation
Outline
1 IntroductionSchrodinger’s CatIntuition and Motivation
2 This study contributionOur modelPrevious workInformation processedSimilar results
3 Summary of Results
4 Summary
presenter: Eddie Aronovich, Tel-Aviv University, Advanced Finance course
IntroductionThis study contribution
Summary of ResultsSummary
Schrodinger’s CatIntuition and Motivation
The same poor cat
The challenge of statistical inference and more...
Luckily the macroeconomics does not assumes S/P (yet!)
presenter: Eddie Aronovich, Tel-Aviv University, Advanced Finance course
IntroductionThis study contribution
Summary of ResultsSummary
Schrodinger’s CatIntuition and Motivation
Outline
1 IntroductionSchrodinger’s CatIntuition and Motivation
2 This study contributionOur modelPrevious workInformation processedSimilar results
3 Summary of Results
4 Summary
presenter: Eddie Aronovich, Tel-Aviv University, Advanced Finance course
IntroductionThis study contribution
Summary of ResultsSummary
Schrodinger’s CatIntuition and Motivation
Intuition
Announcements days clears the macroeconomic state⇒The days before should reflect expectations and theday(s) after the information
The risk on announcement days includes inter-temporalrisk in addition to market risk - Merton (1973)
presenter: Eddie Aronovich, Tel-Aviv University, Advanced Finance course
IntroductionThis study contribution
Summary of ResultsSummary
Schrodinger’s CatIntuition and Motivation
Intuition
Announcements days clears the macroeconomic state⇒The days before should reflect expectations and theday(s) after the information
The risk on announcement days includes inter-temporalrisk in addition to market risk - Merton (1973)
presenter: Eddie Aronovich, Tel-Aviv University, Advanced Finance course
IntroductionThis study contribution
Summary of ResultsSummary
Schrodinger’s CatIntuition and Motivation
Basic assumptions
Market behavior is affected by macroeconomic information
Most of the information arrives randomly (nonscheduledevents)Some (important) information is prescheduled announced(content is unknown)
Bearing this risk can be pricedThe expectation can be measured neutrallyThe research was made based US data onlyAnd all the other regular assumptions...
presenter: Eddie Aronovich, Tel-Aviv University, Advanced Finance course
IntroductionThis study contribution
Summary of ResultsSummary
Schrodinger’s CatIntuition and Motivation
Main findings (1/2)
Stocks excess returnExcess return on announcements days : 10.6 bps
Overall excess market return: 1.0 bps per day
60% of cumulative annual excess return is earned in 13%of the trading days
30-days T-billsT-bills announcement day return: 1.5 bps
Overall excess market return: 1.7 bps
presenter: Eddie Aronovich, Tel-Aviv University, Advanced Finance course
IntroductionThis study contribution
Summary of ResultsSummary
Schrodinger’s CatIntuition and Motivation
Main findings (1/2)
Stocks excess returnExcess return on announcements days : 10.6 bps
Overall excess market return: 1.0 bps per day
60% of cumulative annual excess return is earned in 13%of the trading days
30-days T-billsT-bills announcement day return: 1.5 bps
Overall excess market return: 1.7 bps
presenter: Eddie Aronovich, Tel-Aviv University, Advanced Finance course
IntroductionThis study contribution
Summary of ResultsSummary
Schrodinger’s CatIntuition and Motivation
Main findings (2/2)
VolatilityStock market return volatility moderately higher onannouncement days (5%-8%)T-bills volatility is small (and smaller on announcementdays)
presenter: Eddie Aronovich, Tel-Aviv University, Advanced Finance course
Et [rt+1]- Expected asset value as predicted at time tβ- Response coefficientzt+1- Distance between expectation and realizationεt+1- Volatility of shocks
presenter: Eddie Aronovich, Tel-Aviv University, Advanced Finance course
Responsiveness of βResponsiveness of β to macro surprises zt+1- Schwert(1981), ...,Fleming and Remolona (1997)
Sensitivity of security returns to unemployment surprisesSensitivity of security returns to unemployment surprises -Boyd, Hu and Jagannathan (2005)Stock market response to rising unemployment:
Positive - during economic expansions (positive β)Negative- during constrains
presenter: Eddie Aronovich, Tel-Aviv University, Advanced Finance course
Consumer Price Indexes (CPI) - program producesmonthly data on changes in the prices paid by urbanconsumers for a representative basket of goods andservices - once a monthProducer Price Index (PPI) program measures theaverage change over time in the selling prices received bydomestic producers for their output - once a monthEmployment figures - once a monthFederal Open Market Committee (FOMC) - controls thethree tools of monetary policy–open market operations, thediscount rate, and reserve requirements (The FederalReserve Act of 1913 gave the Federal Reserveresponsibility for setting monetary policy). - 8 scheduledmeeting per year
presenter: Eddie Aronovich, Tel-Aviv University, Advanced Finance course
Consumer Price Indexes (CPI) - program producesmonthly data on changes in the prices paid by urbanconsumers for a representative basket of goods andservices - once a monthProducer Price Index (PPI) program measures theaverage change over time in the selling prices received bydomestic producers for their output - once a monthEmployment figures - once a monthFederal Open Market Committee (FOMC) - controls thethree tools of monetary policy–open market operations, thediscount rate, and reserve requirements (The FederalReserve Act of 1913 gave the Federal Reserveresponsibility for setting monetary policy). - 8 scheduledmeeting per year
presenter: Eddie Aronovich, Tel-Aviv University, Advanced Finance course
Consumer Price Indexes (CPI) - program producesmonthly data on changes in the prices paid by urbanconsumers for a representative basket of goods andservices - once a monthProducer Price Index (PPI) program measures theaverage change over time in the selling prices received bydomestic producers for their output - once a monthEmployment figures - once a monthFederal Open Market Committee (FOMC) - controls thethree tools of monetary policy–open market operations, thediscount rate, and reserve requirements (The FederalReserve Act of 1913 gave the Federal Reserveresponsibility for setting monetary policy). - 8 scheduledmeeting per year
presenter: Eddie Aronovich, Tel-Aviv University, Advanced Finance course
Consumer Price Indexes (CPI) - program producesmonthly data on changes in the prices paid by urbanconsumers for a representative basket of goods andservices - once a monthProducer Price Index (PPI) program measures theaverage change over time in the selling prices received bydomestic producers for their output - once a monthEmployment figures - once a monthFederal Open Market Committee (FOMC) - controls thethree tools of monetary policy–open market operations, thediscount rate, and reserve requirements (The FederalReserve Act of 1913 gave the Federal Reserveresponsibility for setting monetary policy). - 8 scheduledmeeting per year
presenter: Eddie Aronovich, Tel-Aviv University, Advanced Finance course
Bureau if Labor Statistics (1958-2008)609 employment announcements
Federal Reserve (1978-2008)269 scheduled announcements
CPI (1958-1971), PPI (Feb 1971-Dec 2008)157 pre-scheduled CPI announcements454 pre-scheduled PPI announcementsPPI announcements released a few days earlierdiminishes CPI
presenter: Eddie Aronovich, Tel-Aviv University, Advanced Finance course
CRSP Jun 1961-Dec 2008Daily return on T-bill closest to 30 daysAssumption: log returns on Mondays X3 higher since itcomes after (3) days (Fri-(Sat-Sun)-Mon)Longer return calculated separately in same manner
CBOE S&P 100 Vix index (1986-2008)30-days implied volatility
presenter: Eddie Aronovich, Tel-Aviv University, Advanced Finance course