Browsing by Author "Rinne, Veera"

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Capital asset pricing model beta and excess returns on days that contain macroeconomic announcement
(2020) Rinne, Veera
School of Business | Bachelor's thesis
This thesis examines whether US stock market response is different on days that contain scheduled macroeconomic announcements. Macroeconomic announcements contain valuable information for investors, and thus announcement days contain higher systematic risk than other trading days. I show that investors demand, and in equilibrium receive, higher average excess returns on days that contain macroeconomic announcements compared to other trading days. Furthermore, asset prices are easier to model with traditional finance theories on days that contain macroeconomic announcements. On announcement days, capital asset pricing model beta is positively related to asset returns, meaning that taking higher systematic risk is compensated with higher excess returns. This relation holds for individual stocks, for various test portfolios and even when controlling betas with various factors. On the contrary, on non-announcement days, there exist a negative trade-off between stock market beta and average excess return, so that bearing more systematic risk is associated with lower average excess returns. In addition, I show how traditional return patterns are reversed on macroeconomic announcement days for various test assets. On announcement days, growth portfolios perform better than value portfolios, suggesting that the value premium only exist on non-announcement days. I also show how small capitalization stocks seem to outperform large capitalization stocks only on announcement days, suggesting that the size premium is earned on days that contain macroeconomic announcement, which represent under 13 % of days in my sample. My results suggest that Capital asset pricing model beta is important measure of systematic risk for days that contain macroeconomic announcements, even though the model cannot explain returns on other trading days.
The differences in monetary policy risk premiums between central banks
(2023) Rinne, Veera
School of Business | Master's thesis
Prior literature has documented that stock markets experience large average excess returns in anticipation of the Federal Open Market Committee (FOMC) monetary policy announcements. These FOMC announcement returns are statistically significant in multiple countries and account for a noticeable fraction of the yearly global stock market returns. While countries throughout the globe react to the scheduled FOMC monetary policy announcements, other central banks do not seem to have such an effect internationally or in their home markets. In addition, previous empirical studies have provided evidence that the capital asset pricing model (CAPM) is able to price the cross-section of asset returns on FOMC monetary policy announcement days, and again such a relation cannot be found for other central banks. This result suggests that the CAPM could, after all, be an important measure of systematic risk for a subset of trading days. In this paper, I study how prescheduled monetary policy announcements by the Federal Reserve (Fed), European Central Bank (ECB), Bank of England (BoE), and Bank of Japan (BoJ) affect the risk and return on the global equity markets. Following earlier empirical literature, I show that global equity markets respond strongly to the FOMC monetary policy announcements, but a similar relation cannot be robustly detected for the ECB, BoE, and BoJ. I continue by studying the relation between the stock market beta and average excess returns on monetary policy announcement days, and explain why the CAPM, which is known to be misspecified, seems to be able to price the cross-section of asset returns on FOMC announcement days but fails on other trading days. I argue that the FOMC announcement day returns play a vital role in global yearly stock market returns, which indicates that the Fed holds a unique position in the global financial markets. I discuss how the Fed’s position does not seem to simply come from the size of the US economy or other countries’ exposure to multinational companies that generate a large share of their returns from the US. Even though central banks within the scope of the study have pursued active monetary policy during the research period, I show that the Fed typically acts as the leader in setting the global monetary policy. If the Fed indeed acts as the leader among central banks, then this could explain the global reaction to the FOMC monetary policy announcements as well as the lack of reaction to other central banks’ announcements. In addition to this hypothesis, I present and discuss multiple additional hypotheses and factors that could cause the Fed to be more important to global investors compared to the other non-US central banks.