The Relation Between Expected Returns and Betas
Friday, Jan. 4, 2019 2:30 PM - 4:30 PM
- Chair: Daniel Andrei, University of California-Los Angeles
The Macroeconomic Announcement Premium
AbstractEmpirical studies demonstrate striking patterns in stock market returns in relation to scheduled macroeconomic announcements. First, a large proportion of the total equity premium is realized on days with macroeconomic announcements, despite the small number of such days. Second, the relation between market betas and expected returns is far stronger on announcement days as compared with non-announcement days. Finally, these results hold for fixed-income investments as well as for stocks. We present a model with rare events that jointly explains these phenomena. In our model, which is solved in closed form, agents learn about a latent disaster probability from scheduled announcements. We quantitatively account for the empirical findings, along with other facts about the market portfolio.
Asset Pricing: A Tale of Night and Day
AbstractStock prices behave very differently with respect to their sensitivity to market risk (beta) when markets are open for trading versus when they are closed. The capital asset pricing model (CAPM) performs poorly overall as beta is weakly related to 24-hour returns. This is driven entirely by trading-day returns, i.e., open-to-close returns are negatively related to beta in the cross section. The CAPM holds overnight when the market is closed. The CAPM holds overnight for the U.S. and internationally for: beta-sorted portfolios, 10 industry and 25 book-to-market portfolios, cash-flow and discount-rate beta-sorted portfolios, and individual stocks. These results are consistent with transitory beta-related price effects at the open and the close.
- G1 - General Financial Markets