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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
Ravi Jagannathan
Jian Hu

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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. Thus stock prices usually increase on news of rising unemployment, since the economy is usually in an expansion phase. We provide an explanation for this phenomenon. Unemployment news bundles two primitive types of information relevant for valuing stocks: information about future interest rates and future corporate earnings and dividends. A rise in unemployment typically signals a decline in interest rates, which is good news for stocks, as well as a decline in future corporate earnings and dividends, which is bad news for stocks. The nature of the bundle -- and hence the relative importance of the two effects -- changes over time depending on the state of the economy. For stocks as a group, and in particular for cyclical stocks, information about interest rates dominates during expansions and information about future corporate earnings dominates during contractions.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8092.

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Date of creation: Jan 2001
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Handle: RePEc:nbr:nberwo:8092

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Find related papers by JEL classification:
E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
G1 - Financial Economics - - General Financial Markets

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  5. Keim, Donald B. & Stambaugh, Robert F., 1986. "Predicting returns in the stock and bond markets," Journal of Financial Economics, Elsevier, vol. 17(2), pages 357-390, December. [Downloadable!] (restricted)
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  6. repec:fth:prinin:367 is not listed on IDEAS
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  12. John Campbell & Jianping Mei, 1993. "Where do Betas Come From? Asset Price Dynamics and the Sources of Systematic Risk," NBER Working Papers 4329, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  16. 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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  17. Veronesi, Pietro, 1999. "Stock Market Overreaction to Bad News in Good Times: A Rational Expectations Equilibrium Model," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 12(5), pages 975-1007.
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  19. Ferson, Wayne E & Harvey, Campbell R, 1993. "The Risk and Predictability of International Equity Returns," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 6(3), pages 527-66. [Downloadable!] (restricted)
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