Abstract
A simple model of investor behavior can capture the cross-sectional and time-series patterns of stock returns around macroeconomic announcement days. The model makes several predictions that I confirm empirically: i) The security market line on announcement days is much flatter when sentiment demand is high. ii) On high-sentiment months, the announcement returns of portfolios exploiting CAPM-mispricing are larger. iii) Bad news resolve less uncertainty on macroeconomic announcements, causing a price drift after bad news, and a post-announcement negative premia. iv) CAPM-underpriced (overpriced) stocks deliver most of their price correction during the days leading to (after) macroeconomic announcements.
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