Professor Jun Pan (Chair Professor at SAIF) and Professor Jiang Wang (Chair of Academic Council at SAIF)'s paper "Premium for Heightened Uncertainty: Explaining Pre-Announcement Market Returns" has been accepted for publication in the Journal of Financial Economics (JFE).
JFE is one of the Top 3 international financial journals in the world, along with Journal of Finance (JF) and Review of Financial Studies (RFS). It is a peer-reviewed academic journal covering both theoretical and empirical types of research within financial economics.
The paper's co-authors are Professor Xing Hu (PBC School of Finance at Tsinghua University) and Professor Haoxiang Zhu (Sloan School of Management at MIT).
Abstract of the Paper:
We find large overnight returns with no abnormal variance before nonfarm payrolls, ISM, and GDP announcements, 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.