Does Unemployment Risk Affect Asset Returns? The Long-Run UK Evidence

U of Exeter Business and Economics Working Paper

32 Pages Posted: 22 Mar 2002

See all articles by Nonthipoth Buranavityawut

Nonthipoth Buranavityawut

University of Exeter Business School

Mark C. Freeman

University of Bradford - School of Management

Date Written: February 2002

Abstract

This paper examines the correlation structure between asset returns and unemployment surprises. Using UK data, it is possible to study this relationship not only over the more economically stable post WWII period, but also during the Great Depression. It is shown that the correlation between stock returns and unemployment shocks is significantly negative during the inter-war years, but not in the period since WWII. This is consistent with theoretical work that suggests that labor income risk concentrated in economic "crash" states is most likely to resolve the equity premium puzzle.

Keywords: Incomplete markets, asset pricing theory, unemployment, Great Depression

JEL Classification: G12, N24, N34, J60

Suggested Citation

Buranavityawut, Nonthipoth and Freeman, Mark C., Does Unemployment Risk Affect Asset Returns? The Long-Run UK Evidence (February 2002). U of Exeter Business and Economics Working Paper. Available at SSRN: https://ssrn.com/abstract=302803 or http://dx.doi.org/10.2139/ssrn.302803

Nonthipoth Buranavityawut

University of Exeter Business School ( email )

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Mark C. Freeman (Contact Author)

University of Bradford - School of Management ( email )

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United Kingdom
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+44 (0)1274 546866 (Fax)

HOME PAGE: http://www.manag.brad.ac.uk/people/people.php?name=mcfreema

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