The Stock Market's Reaction to Unemployment News: 'Why Bad News is Usually Good for Stocks'
48 Pages Posted: 24 Jul 2003
Date Written: December 2002
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, 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 and/or the equity risk premium dominates during contractions.
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