Macroeconomic Announcements: How Announcements Shape Trading Strategies.

The Capital Asset Pricing Model (CAPM) is a widely used and tractable model relating financial risk and return. However, it has been less successful when taken to the data. In their seminal paper, Frazzini and Pedersen propose a Betting Against Beta (BAB) factor to take advantage of this fact. In their construction, the BAB factor is a portfolio which longs low-beta stocks and shorts high-beta stocks. Since its construction, the BAB factor has been widely cited and used both in financial academics and in industry. This paper proposes a novel betting on and against beta (BOAB) strategy, which bets on beta on days with macroeconomic announcements and bets against beta on days without. Here, macroeconomic announcement days are defined as days when inflation, unemployment, or interest rate decisions are released. Our findings confirm the persistent positive beta-return relationship observed on macroeconomic announcement days. We show that compared to the BAB strategy, BOAB delivers higher average daily excess returns over the time period 1964 to 2021 when applied to the U.S. stock market. This outperformance of the BOAB strategy is robust to different constructions of the BAB factor and is economically and statistically significant when compared with the usual asset pricing factors such as value, size, and momentum. The outperformance of the BOAB strategy could be used to inform agents' portfolio allocation choices. Limitations are also discussed. Plain Language Summary: Macroeconomic announcements and trading strategies Trading strategies are important because they impact how financial market participants invest and manage risk-return tradeoffs. This paper proposes a betting on and against beta (BOAB) strategy, which takes long positions on beta on a subset of trading days and short positions on other days. We determined which days to take long beta positions by testing the prediction of asset pricing models on days with macroeconomic announcements. We carefully constructed macroeconomic announcement days and used the Fama-MacBeth two-step testing procedure to evaluate predictions of the CAPM model. We conclude that the BOAB strategy outperforms the BAB factor, especially due to its outperformance on days with macroeconomic announcements. In the process, we consider varying ways of constructing the betting against beta factor to address critiques of the original BAB factor. We also demonstrate that the large, positive returns of the BAB factor has diminished since the publication of the original BAB paper. [ABSTRACT FROM AUTHOR]