Summary

The macroeconomic announcement premium refers to the fact that a large fraction of the equity market risk premium is realized on a small number of trading days with significant macroeconomic announcements. Examples include monetary policy announcements by the Federal Open Market Committee, unemployment/non-farm payroll reports, the Producer Price Index published by the U.S. Bureau of Labor Statistics, and the gross domestic product reported by the U.S. Bureau of Economic Analysis. 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.

The existence of the macroeconomic announcement premium has important implications for modeling risk preferences in economics and finance. It provides strong support for non-expected utility analysis. The study of Ai and Bansal demonstrates that the existence of the macroeconomic announcement premium implies that investors’ preferences cannot have an expected utility representation and must satisfy generalized risk sensitivity, a property shared by many non-expected utility models such as the maxmin expected utility of Gilboa and Schmeidler, the recursive utility of Epstein and Zin, and the robust control preference of Hansen and Sargent.

Because the amount of risk compensation is proportional to the magnitude of variations in marginal utility, the macroeconomic announcement premium highlights information as the most important driver of marginal utility. This observation has profound implications for many economic analyses that rely on modeling either time-series variation or cross-sectional heterogeneity in marginal utility across agents, such as consumption risk sharing, the trade-off between equality and efficiency, exchange rate variations, and so on. The link between macroeconomic policy announcements and financial market risk compensation is an important direction for future research.