Macroeconomic Announcements: How Announcements Shape Trading Strategies

Abstract

The Capital Asset Pricing Model (CAPM) is a widely used and tractable model relating financial risk and return. However, it has been less successful when taken to the data. In their seminal paper, Frazzini and Pedersen propose a Betting Against Beta (BAB) factor to take advantage of this fact. In their construction, the BAB factor is a portfolio which longs low-beta stocks and shorts high-beta stocks. Since its construction, the BAB factor has been widely cited and used both in financial academics and in industry. This paper proposes a novel betting on and against beta (BOAB) strategy, which bets on beta on days with macroeconomic announcements and bets against beta on days without. Here, macroeconomic announcement days are defined as days when inflation, unemployment, or interest rate decisions are released. Our findings confirm the persistent positive beta-return relationship observed on macroeconomic announcement days. We show that compared to the BAB strategy, BOAB delivers higher average daily excess returns over the time period 1964 to 2021 when applied to the U.S. stock market. This outperformance of the BOAB strategy is robust to different constructions of the BAB factor and is economically and statistically significant when compared with the usual asset pricing factors such as value, size, and momentum. The outperformance of the BOAB strategy could be used to inform agents’ portfolio allocation choices. Limitations are also discussed.