Premium for Heightened Uncertainty: Explaining Pre-Announcement Market Returns

Grace Xing Hu, Jun Pan, Jiang Wang, Haoxiang Zhu

NBER Working Paper No. 25817
Issued in May 2019, Revised in March 2021
NBER Program(s):Asset Pricing

We find large overnight returns, with no abnormal variance, before the release of nonfarm payrolls, ISM, and GDP, similar to the pre-FOMC returns. To explain this common pattern, we propose a two-risk model with the uncertainty about the magnitude of the impending news' market impact as an additional risk, and link the pre-announcement return directly to the accumulation of heightened uncertainty and its later resolution prior to the announcement. We empirically test and verify the model's distinct predictions on the joint intertemporal behavior of return, variance, and particularly VIX—a gauge of impact uncertainty by our model, surrounding macroeconomic announcements.

Acknowledgments

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Document Object Identifier (DOI): 10.3386/w25817