Abstract/Summary

This thesis investigates asset pricing with macroeconomics. Chapter 1 gives an overview of this thesis, including background, motivations and contributions. Chapter 2 documents the economic momentum effects in country-level equity indices. Momentum is a well-known and studied artefact of financial markets. In this paper, we investigate whether momentum in a country’s macroeconomic variables is related to the future performance of equities. We find that the past economic trends of a country’s fundamentals are positively associated with the equity market index returns, termed the economic momentum effects. Based on that, an economic momentum portfolio of buying (selling) equity index in countries with relatively strong (weak) economic past trends exhibits an annualised Sharpe ratio of 0.87. The economic momentum portfolio outperforms benchmarks regarding rewards to variability and maximum drawdown and yields an annualised alpha of 3.5% Chapter 3 examines the trading behaviour of noise traders in response to macro announcements. By employing direct and indirect proxies to capture their attention, we show that noise traders’ market-concentrated attention on macro-announcement days spills over to individual firms during post-macro-announcement periods, denoted as attention spillover effects. Both retail and institutional noise traders exhibit rising abnormal attention on stocks following the macro-announcements. Furthermore, we find that the attention spillover effects are more pronounced among stocks without earnings announcements and are particularly noticeable in FOMC announcements. Chapter 4 examines the performance of equity options surrounding the scheduled meetings of the Federal Open Market Committee (FOMC). We document significant excess returns on equity options after the FOMC, denoted as the post-FOMC drift, which the standard asset pricing models cannot explain. Upon investigating the mechanisms, we find that this pattern is particularly pronounced in the context of FOMC announcements accompanied by economic surprises, as investors tend to overreact to such shocks. Additionally, we identify that options’ illiquidity plays a significant role in driving this drift, as market participants demand higher expected returns to compensate for the heightened illiquidity risk during post-FOMC periods. Furthermore, our analysis leads us to conclude that the observed drift is more pronounced among put options than call options. Lastly, Chapter 5 concludes the thesis and discusses future research.