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Publication . Article . 2005

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

John H. Boyd; Jian Hu; Ravi Jagannathan;
Open Access

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. THIS STUDY INVESTIGATES THE SHORT-RUN response of stock prices to the arrival of macroeconomic news. The particular news event we consider is the Bureau of Labor Statistic’s (BLS) monthly announcement of the unemployment rate. We establish that the stock market’s response to unemployment news arrival depends on whether the economy is expanding or contracting. On average, the stock market responds positively to news of rising unemployment in expansions, and negatively in contractions. Since the economy is usually in an expansion phase, it follows that the stock market usually rises on the announcement of

Subjects by Vocabulary

JEL Classification: jel:E3 jel:G1

Microsoft Academic Graph classification: Dividend Future interest Stock market Financial economics Unemployment media_common.quotation_subject media_common Economics Earnings Growth stock Interest rate Risk premium Stock (geology) Statistic Monetary economics


Economics and Econometrics, Finance, Accounting

French, Kenneth R., G. William Schwert and Robert F. Stambaugh, 1987, “Expected stock returns and volatility”, Journal of Financial Economics, 19, 3-29.

Gertler, M., Grinols, E.L. (1982), “Unemployment, Inflation, and Common Stock Returns”, Journal of Money, Credit and Banking 14, 216-233.

Glosten, Lawrence R., Ravi Jagannathan, and David Runkle, 1993, “On the relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks”, Journal of Finance, Vol 48, No. 5, 1779-1801. [OpenAIRE]

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