Market Reaction to Macroeconomic News: The Role of Investor Sentiment

This paper demonstrates that risk is unlikely to be the only factor explaining the excess return difference between macroeconomic announcement days and other trading days. We argue that investor sentiment may affect the return on the prescheduled macroeconomic news release. We find that the return on macroeconomic announcement days is much higher than the return on other days, especially when changes in investor sentiment are higher. The impact of investor sentiment on the macroeconomic announcement effect is greater when investor sentiment is higher. Our results remain valid using different investor sentiment measures and testing for heteroscedasticity in stock returns.