Capital asset pricing model beta and excess returns on days that contain macroeconomic announcement

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School of Business | Bachelor's thesis
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Degree programme
36 + 5
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.
Thesis advisor
Shin, Sean
capital asset pricing model, macroeconomic announcement, asset pricing, systematic risk