The Econometric SocietyEdited by: Guido W. Imbens • Print ISSN: 0012-9682 • Online ISSN: 1468-0262
Econometrica: Jul, 2018, Volume 86, Issue 4
https://doi.org/10.3982/ECTA14607
p. 1383-1430
Hengjie Ai, Ravi Bansal
This paper develops a revealed preference theory for the equity premium around macroeconomic announcements. Stock returns realized around pre‐scheduled macroeconomic announcements, such as the employment report and the FOMC statements, account for 55% of the market equity premium. We provide a characterization theorem for the set of intertemporal preferences that generates a nonnegative announcement premium. Our theory establishes that the announcement premium identifies a significant deviation from time‐separable expected utility and provides asset‐market‐based evidence for a large class of non‐expected utility models. We also provide conditions under which asset prices may rise prior to some macroeconomic announcements and exhibit a pre‐announcement drift.
This zip file contains the replication files for the manuscript.
IN THIS SUPPLEMENT, we provide details of the proofs omitted in the main text and the appendices of the paper. In Section S.1, we prove the equivalence between the Arrow– Debreu setup and the sequential market setup in the two-period model. Section S.2 contains details of the certainty equivalent functionals of dynamic preferences that Theorems 1 and 2 allow for and the associated A-SDF. Section S.3 provides details of the continuous time model in Section 5 of the paper.
