Does economic data and news affect returns and trading? Yes, is the answer – and way more than you might expect. 

Macro matters, according to a new National Bureau of Economic Research (NBER) working paper from Hengjie Ai, Ravi Bansal and Hongye Guo. 

The findings are revealing: “During the period 1961-2023, roughly 44 days per year with macroeconomic announcements account for more than 71% of the aggregate equity market risk compensation.” This is tendency is called the ‘macroeconomic announcement premium’. 

The paper explains, at the daily level, the average stock market excess return is 10.68 basis points (bps) on announcement days and 0.93bps on days without major macroeconomic announcements, such as inflation prints and Fed decisions and “as a result, the cumulative excess stock market return on the 44 announcement days averages 4.65% per year, accounting for about 71% of the annual equity premium (6.59%)” 

That seems a lot, but it’s not new information as such. Because we’ve seen that Pavel Savor and Mungo Wilson have shown that interest rate decisions and inflation reports fuelled a hefty amount of stock market returns. Anyone who’s traded the nonfarm payrolls would probably understand what’s going on here. 

They found that in the 1958–2009 period the average excess daily return on a broad index of US stocks is 11.4 bps on announcement days versus 1.1 bps on all other days.  This implies that over 60% of the equity risk premium is earned on announcement days, which constitute just 13% of the sample period. 

Research since has expanded to look at things like political events and the Fed.  

But the new NBER paper shows the trend is getting strong. This is interesting as it demonstrates how interest rate volatility has been a lot more pronounced. macro hedge funds did better in the last three years than the ten before those, when central banks kept rates down, since the GFC inflation reports didn’t appear to make any difference. Now they certainly do, and traders are more mindful about holding risk into economic release like the CPI.  

Specifically, from January 2020 to August 2023, the average announcement premium was 16.33 basis points per announcement, higher than the full sample average of 10.68 basis points. 

And it’s particularly noteworthy on Fed days, as this table shows. 

Ai, Bansal and Guo indicate that the reason is one of risk compensation – if you hold risk into a release – a period of uncertainty – you assume the need to be compensated afterwards. Markets generally resent uncertainty. “The macroeconomic announcement premium reflects  that risk compensation is realised when information is revealed. It requires a pricing kernel with a forward-looking component,” they explain. 

Wilson and Savor note how “investors are compensated for bearing beta risk exactly when risk premia are high”. 

Or, as they put it, beta is “an important measure of systematic risk … At times when investors expect to learn important information about the economy, they demand higher returns to hold higher-beta assets”. 

Neil Wilson Chief Market Analyst at Finalto

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