Information acquisition and the pre-announcement drift
Files
First author draft
Date
2021-11-13
Authors
Ai, Hengjie
Bansal, Ravi
Han, Leyla Jianyu
Version
First author draft
OA Version
Citation
H. Ai, R. Bansal, L.J. Han. "Information Acquisition and the Pre-Announcement Drift." SSRN Electronic Journal, https://doi.org/10.2139/ssrn.3964349
Abstract
We present a dynamic Grossman-Stiglitz model with endogenous information acquisition to explain the pre-FOMC announcement drift. Because FOMC announcements reveal substantial information about the economy, investors’ incentives to acquire information are particularly strong days ahead of the announcements. Information acquisition partially resolves the uncertainty for uninformed traders, and under generalized risk sensitive preferences (Ai and Bansal, 2018), lower the discount rate and results in a stock market run-up. Because our theory does not rely on the leakage of information, it can simultaneously explain the low realized volatility during the pre-FOMC announcement period and the lack of a positive correlation between pre-and post-announcement returns.