Macroeconomic News and Stock Returns

Project: Research

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We propose to study the impact of the presence of news release regarding the macro-economy (specifically unemployment, inflation and central bank policy) on stock returns. Most prior research in this area has focused on the study of the impact of the content of such news releases on asset returns. Recent research by Savor and Wilson has shifted the focus to the mere presence of such news releases by showing that the overall stock market returns are much higher on days when such news is released in comparison to other days. The magnitude of this difference in returns is large (approximately 0.10% on a daily basis or nearly 25% on a yearly basis) and both economically and statistically significant. This result is particularly interesting as the release of such news is scheduled months or even years in advance and so investors know whether very much in advance whether such news is going to be released on any particular day. The high level of returns must therefore compensate some important risk as investors would otherwise take advantage of this pattern.In the first part of this project, we therefore aim to study the specific nature of the underlying macro-economic risk that is being compensated by these relatively large returns. This question is of fundamental importance as the specific nature of this risk has not yet been identified in the literature. The identification of this underlying risk(s) will enable us to derive novel implications regarding the structure of stock market returns and its temporal variation with regard to macroeconomic news releases. Such novel implications can then be tested using the data and will thus thus enable a significant advance in the theoretical and empirical understanding of the link between the presence of macroeconomic news and stock returns in general. Preliminary results obtained by us indicate that the consumption risk of stockholders is an important risk that is being compensated on such days. We also derive some novel implications regarding the variation of the cross section of stock returns between such days and other days using this preliminary analysis and verify that they are indeed satisfied in the data.In the second phase of this project, we aim to study this link from the firm's point of view by concentrating on it's production function and constructing a production based macroeconomic asset pricing model using the results of the first part of the project.


Project number9042143
Grant typeGRF
Effective start/end date1/09/1413/06/17