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The Stock Market's Reaction to Unemployment News: Why Bad News Is Usually Good for Stocks

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Author Info
JOHN H. BOYD
JIAN HU
RAVI JAGANNATHAN

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Abstract

We find that on average, an announcement of rising unemployment is good news for stocks during economic expansions and bad news during economic contractions. Unemployment news bundles three types of primitive information relevant for valuing stocks: information about future interest rates, the equity risk premium, and corporate earnings and dividends. The nature of the information bundle, and hence the relative importance of the three effects, changes over time depending on the state of the economy. For stocks as a group, information about interest rates dominates during expansions and information about future corporate dividends dominates during contractions. Copyright 2005 by The American Finance Association.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1540-6261.2005.00742.x
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Publisher Info
Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 60 (2005)
Issue (Month): 2 (04)
Pages: 649-672
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Handle: RePEc:bla:jfinan:v:60:y:2005:i:2:p:649-672

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  13. Ravi Jagannathan & Keiichi Kubota & Hitoshi Takehara, 1997. "Relationship between labor-income risk and average return: empirical evidence from the Japanese stock market," Discussion Paper / Institute for Empirical Macroeconomics 117, Federal Reserve Bank of Minneapolis. [Downloadable!]
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