Tim Olson
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description, tags
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| A macro strategy that holds equities exclusively on important economic announcement days (FOMC, etc.) and switches to risk-free assets on all other days, exploiting the empirical announcement premium. |
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Trading on Economic Announcements
Section: 19.5 | Asset Class: Global Macro | Type: Event-driven / Calendar-based
Overview
Empirical evidence suggests that stocks tend to yield higher returns on important announcement dates — such as Federal Open Market Committee (FOMC) announcement days — than on other trading days. A simple macro trading strategy exploits this "announcement premium" by holding equities (via ETFs or futures) only on announcement days (ADs) and switching to risk-free assets (e.g., Treasuries) during all non-announcement days (NDAs). The strategy rotates 100% between equity exposure and Treasury exposure based solely on the calendar of scheduled announcements.
Construction / Mechanics
Signal Construction
-
Identify a set of important economic announcement dates (ADs). The primary example is FOMC announcement days, but other relevant announcements may include:
- Non-Farm Payrolls (NFP)
- CPI/inflation releases
- GDP advance estimates
- Other major central bank decisions (ECB, BoE, etc.)
-
For each trading day
t:- If
tis an announcement day (AD): hold equity ETFs/futures - If
tis a non-announcement day (NDA): hold risk-free assets (e.g., T-bills or short-term Treasuries)
- If
Execution
- Implemented via ETFs (e.g., SPY for U.S. equities, SHY/BIL for short-term Treasuries) or futures (e.g., E-mini S&P 500 futures + T-bond futures)
- Positions are switched at the open or close on the day before/day of each announcement
- The strategy moves from 100% equities on ADs to 100% Treasuries on NDAs (binary switching)
- Individual stocks are not used — the strategy operates at the index/ETF level
Optional Technical Filters
The basic binary strategy can be augmented with various technical filters (e.g., momentum filters on the equity index) to further refine the signal and potentially improve the risk-adjusted return profile.
Return Profile / Objective
The strategy captures the empirically documented "announcement premium" — the excess return accruing to equity holders on announcement days relative to non-announcement days. By being fully invested in equities only on ADs and earning the risk-free rate otherwise, the strategy aims to achieve equity-like returns with substantially reduced time-in-market and potentially lower overall risk. Returns are driven by the persistence of the announcement premium rather than by market direction.
Key Parameters / Signals
- Announcement calendar: the set of ADs used (FOMC dates are the primary source; typically 8 per year for FOMC)
- Equity instrument: broad index ETF or futures (e.g., S&P 500)
- Risk-free instrument: T-bills, overnight repo, or short-term Treasury ETF
- Switching timing: day-before close vs. announcement-day open; affects transaction costs
- Technical filter (optional): momentum or trend filter applied to the equity index to gate the switch
- Announcement types included: FOMC only vs. broader macro announcement set
Variations
- Multi-announcement strategy: include NFP, CPI, GDP, and other macro releases in addition to FOMC
- International extension: apply to other central bank announcements (ECB, BoJ, BoE) for non-U.S. equity indexes
- Sector rotation on announcements: hold rate-sensitive sectors on specific announcement types
- Options-based implementation: use straddles around announcement dates to capture realized volatility premium
- Partial allocation: hold a fixed fraction (e.g., 50%) in equities always, and increase to 100% only on ADs
Notes
The existence and persistence of the FOMC announcement premium is well-documented in the academic literature (Savor and Wilson, 2013; Lucca and Moench, 2012). The premium is thought to reflect compensation for macroeconomic uncertainty resolved at announcement events. Transaction costs are relatively low given the infrequent switching (8 FOMC dates per year). The strategy's main risk is that the announcement premium may attenuate or disappear if it becomes widely exploited. Technical filters can help adapt to changing regimes. Because the strategy uses ETFs rather than individual stocks, execution is straightforward and liquidity is not a constraint for most portfolio sizes.