US macroannouncements and international asset pricing

• DOI: http://doi.org/10.1002/ijfe.1592
• Date: 01 October 2017
• Published date: 01 October 2017
• Author: Ding Du

RESEARCH ARTICLE

US macroannouncements and international asset pricing

Ding Du*

Office of the Comptroller of the Currency,

United States Department of the Treasury,

400 7th Street SW, Mail Stop 6E‐3,

Washington 20219 DC, USA

Correspondence

Ding Du, Office of the Comptroller of the

Currency, United States Department of the

Treasury, 400 7th Street SW, Mail Stop

6E‐3, Washington 20219, DC, USA.

Email: ding.du@occ.treas.gov

JEL Codes: F30; G15

Abstract

The world capital asset‐pricing model is the benchmark model in international

finance. However, recent research finds that the premium on the world market

factor is insignificant. In this paper, we investigate if the world market risk

premium is particularly significant on US macroeconomic announcement

days. Empirically, we apply the methodology to daily country exchange‐traded

funds. Our findings suggest that although the world market risk premium is

insignificant on nonannouncement days, it is strongly significant on US macro-

economic announcement days. In addition, we find that US monetary policy

announcements are the most important macroeconomic announcements to

drive the world market risk premium. Our findings are consistent with the

notion of monetary policy uncertainty and the empirical literature that

connects policy uncertainty with systematic risk.

KEYWORDS

exchange‐tradedfunds, macroeconomicannouncements, monetary policy,world capital asset‐pricing

model

1|INTRODUCTION

The world capital asset‐pricing model (World CAPM) of

Solnik (1974a) and Grauer, Litzenberger, and Stehle

(1976) has been used as a benchmark in international

finance (e.g., Harvey, 1991; Lewis, 2011; Solnik, 1974b;

Stehle, 1977).

1

In the World CAPM, world market risk is

the single source of systematic risk underlying asset

returns, and investors earn a positive premium for

exposure to this source of risk. However, in a global

sample of 27,488 common stocks from 49 countries,

Hou, Karolyi, and Kho (2011) find that the premium on

the world market factor is insignificant.

In this paper, we investigate if the world market risk

premium is particularly significant on the US

macroeconomic announcement days. Our investigation is

motivated by the following two observations. First, Savor

and Wilson (2013, 2014) argue that the trade‐off between

state variable risk and asset returns underlying standard

asset‐pricing theories should be particularly strong on

prescheduled macroeconomic announcement days,

because important information about the state of the econ-

omy is revealed at such times. Empirically, Savor and Wil-

son (2014) test the CAPM for the US market and find that

the premium on the US market factor is particularly signif-

icant on US macroeconomic announcement days. Second,

US macroeconomic announcements may reveal important

information about the state of the global economy, as the

US is an important trading partner for many developed

economies (Rapach, Strauss, & Zhou, 2013) and emerging

markets (Wongswan, 2006).

To test our conjecture, we apply the Savor and Wilson

(2014) methodology to daily iShares country exchange‐

traded funds (ETFs). The motivation of using iShares

ETFs is to circumvent the nonsynchronous trading

problem (Ammer, Vega, & Wongswan, 2010). As for

*The views expressed in this paper are those of the author and do not

necessarily reflect those of the Office of the Comptroller of the Currency

or the United States Department of the Treasury. Part of this research

was conducted while Ding Du was visiting the Robert H. Smith School

of Business, University of Maryland at College Park.

Received: 2 August 2015 Revised: 29 August 2017 Accepted: 16 September 2017

DOI: 10.1002/ijfe.1592

352 Copyright © 2017 John Wiley & Sons, Ltd. Int J Fin Econ. 2017;22:352–367.wileyonlinelibrary.com/journal/ijfe

macroeconomic announcements, in line with Savor and

Wilson (2014), we focus on US monetary policy, inflation,

and unemployment announcements. Our findings can be

easily summarized. Although the premium on the world

market risk factor is not significant on nonannouncement

days, it is significantly positive on US macroeconomic

announcement days. In addition, we find that US

monetary policy announcements are the most important

macroeconomic announcements to drive the world

market risk premium.

Du and Hu (2015) also study the world market risk

premium in relation to US macroeconomic announce-

ments. However, they focus on firms from developed mar-

kets that are cross‐listed in the US. There are two

potential problems with their sample. First, cross‐listed

firms may not be representative. Twelve out of 20 devel-

oped markets in their sample have less than 20 stocks

cross‐listed in the US (see their Table 1 on page 78). Fur-

thermore, because cross‐listing is an endogenous decision,

firms cross‐listed in the US may be fundamentally differ-

ent from those that choose not to cross‐list (Doidge,

Karolyi, & Stulz, 2004). Second, Du and Hu (2015) do

not take into account emerging markets, although there

is growing evidence of market integration (e.g., Bekaert,

Harvey, Kiguel, & Wang, 2016). Therefore, different from

Du and Hu (2015), we use country ETFs that are designed

to track broad indexes from both developed and emerging

markets. In addition, we also use Eurozone and United

Kingdom (UK) macroeconomic announcements (to high-

light the importance of US macroeconomic announce-

ments) and returns in local currency terms (to show that

worldwide investors, not just US investors, earn a signifi-

cantly positive risk premium on US macroeconomic

announcement days).

The remainder of the paper is organized as follows:

Section 2 describes our data; Section 3 documents the

US macroeconomic announcement effects in the global

equity market; Section 4 reports asset‐pricing test results;

Section 5 discusses our results; Section 6 concludes the

paper with a brief summary.

2|DATA

We focus on US inflation, unemployment, and monetary

policy announcements. Inflation and unemployment

announcement dates are from the US Bureau of Labor

Statistics. Producer price index announcements instead

of consumer price index announcements are used,

because producer price index is released earlier in our

sample. The dates for the US Federal Open Market

Committee scheduled monetary policy announcements

are from the US Federal Reserve. Unscheduled Federal

Open Market Committee meetings are not included in

the sample.

To examine the risk–return relationship across differ-

ent types of trading days, we use daily data as in Savor

and Wilson (2013, 2014). A major challenge in interna-

tional asset pricing with daily data is the nonsynchronous

trading problem. This problem is particularly troublesome

in our setting. For instance, although US inflation and

unemployment announcements are released at 8:30 am

EST when European markets are still open, US monetary

policy announcements are released at 2:15 pm EST after

European markets are closed. Furthermore, Asian mar-

kets close at 1:00 am EST, before US macroeconomic

announcements are released. As a result, the closing price

in a non‐US market may not fully incorporate all the mac-

roeconomic news released in the US on the same calendar

day. To circumvent this problem, in the same spirit of

Ammer et al. (2010), we use iShares Morgan Stanley Cap-

ital International (MSCI) country ETFs that trade contem-

poraneously with US stocks as our base test assets. The

daily returns in the US dollar terms are from Bloomberg.

Table 1 shows the 38 country ETFs used in this study, of

which 21 country ETFs are developed‐market (DM) ETFs

and 17 are emerging‐market (EM) ETFs.

We use the gross MSCI World Index (including

dividends) from Bloomberg (ticker code: GDUEACWF)

as our proxy for the world market index. The world market

return is calculated as the log first difference of

GDUEACWF. Following previous studies (e.g., Fama &

French, 1998), the US risk‐free rate is used as the proxy

for the world risk‐free rate. The US risk‐free rate and the

US market portfolio return data are from Kenneth French's

website.

2

Our sample period is from January 4, 1999 to

May 9, 2014.

3|US MACROECONOMIC

ANNOUNCEMENT EFFECTS IN THE

GLOBAL EQUITY MARKET

If global investors take more systematic risk on US

macroeconomic announcement days (due to US policy

uncertainty implied by Mueller, Tahbaz‐Salehi, &

Vedolin, 2017), they should demand higher returns.

To test this conjecture, we examine mean excess

returns of country ETFs across two types of trading

days, namely, US macroeconomic announcement and

nonannouncement days.

3.1 |Developed markets

The World CAPM assumes an integrated global market.

Because developed markets may be more integrated

DU 353