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

Author

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  • JOHN H. BOYD
  • JIAN HU
  • RAVI JAGANNATHAN

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.

Suggested Citation

  • John H. Boyd & Jian Hu & Ravi Jagannathan, 2005. "The Stock Market's Reaction to Unemployment News: Why Bad News Is Usually Good for Stocks," Journal of Finance, American Finance Association, vol. 60(2), pages 649-672, April.
    • Handle: RePEc:bla:jfinan:v:60:y:2005:i:2:p:649-672
    DOI: 10.1111/j.1540-6261.2005.00742.x
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    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • G1 - Financial Economics - - General Financial Markets

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