Beyond the Event Horizon: Peak Risk-Adjusted Performance in Post-Event Markets

Yee, Brandon (2025): Beyond the Event Horizon: Peak Risk-Adjusted Performance in Post-Event Markets.

Abstract

We develop a dynamic asset pricing model to analyze investor behavior around high-uncertainty events such as earnings announcements and FDA approvals. Our key innovations include: (1) a two-risk framework distinguishing between directional news risk (uncertainty about event outcomes) and impact uncertainty (uncertainty about market response magnitude); (2) a three-phase volatility process (pre-event rise, event-day peak, post-event dynamics) modeled through GJR-GARCH specifications; and (3) integration of heterogeneous investor beliefs and asymmetric transaction costs. Investors with mean-variance preferences trade an event-related asset and a generic risky asset in a multi-period framework. We solve for equilibrium prices with three investor types: informed, uninformed, and liquidity traders. Our model generates a testable hypothesis predicting that risk-adjusted returns, specifically return-to-variance and Sharpe ratios, peak during the post-event rising phase due to high volatility and biased expectations. Empirical validation using 2000-2024 data from earnings announcements and FDA approvals provides exceptionally strong support for our predictions, with return-to-variance ratios showing 4.4x amplification for FDA approvals and 9.5x enhancement for earnings announcements during the post-event rising phase. The framework provides insights for risk management and investment timing around high-uncertainty events.

• Item Type: MPRA Paper
• Language: English
• Keywords: Asset pricing, Two-risk framework, Directional news risk, Impact uncertainty, Event-driven returns, Volatility dynamics, Mean-variance preferences, Transaction costs, Asymmetric volatility, Liquidity trading
• Subjects: C - Mathematical and Quantitative Methods > C0 - General; C - Mathematical and Quantitative Methods > C0 - General > C01 - Econometrics; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C50 - General; C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C60 - General; G - Financial Economics > G0 - General; G - Financial Economics > G0 - General > G02 - Behavioral Finance: Underlying Principles; G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates

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