Abstract
The relationship between market beta and expected returns is positive on days with pre-scheduled macroeconomic news announcements (MNAs), but negative on the other days. This paper shows evidence that stock price underreaction to MNAs explains these phenomena. First, I use high-frequency S&P 500 futures data to identify positive (good) and negative (bad) news from macro announcements. Stocks with low sensitivities to bad macro news perform relatively well on announcement days and poorly on the following non-announcement days. Moreover, the under-performance of low sensitivity stocks is most pronounced when investor disagreement is high and short-selling constraints are binding. Subsequently, I show that the relation between market betas and returns on announcement (non-announcement) days is particularly positive (negative) among stocks with low sensitivities to bad macro news. The results are consistent with stocks, especially those with high market betas, underreact to bad news on MNA days when high shorting costs prevent prices from reflecting pessimists’ beliefs, and experience low returns on the following non-announcement days.
Published Version
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