The risk-return relationship on macroeconomic announcement days : an empirical study of the Norwegian stock market

Abstract

On days when macroeconomic news in Norway is scheduled to be announced, we find a significant and linear relationship between the market beta and average daily excess return. Using Fama-Macbeth regressions, we estimate a negative market risk premium of -1.02% per month (-11.68% annualized). During our sample period from 2001-2015, the realized market risk premium is negative, amounting to -0.20% per month (-2.46% annualized). As a consequence, stocks with higher sensitivity to the market, measured by beta, will earn negative excess return. Hence, our estimate of the implied risk premium turns negative. Using ten beta-sorted portfolios and individual stocks as test assets, we provide empirical evidence of market beta as an important determinant of average excess return in the Norwegian stock market. This risk-return relationship holds on announcement days, while there is no significant relationship on all other trading days. In addition, we test this relationship on different types of announcement days separately, and find no significance. This indicates that it is the aggregated effect of all announcements that cause the significant relationship between market beta and average excess return. Further, we find that our test assets are more affected by Norwegian announcements than announcements from the US, as market beta does not relate significantly to average excess return on US announcement days.