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

48 Pages Posted: 24 Jul 2003

See all articles by John H. Boyd

John H. Boyd

University of Minnesota - Twin Cities - Carlson School of Management

Jian Hu

Moody's Investors Service

Ravi Jagannathan

Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER); Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF); Indian School of Business (ISB), Hyderabad

Date Written: December 2002

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, 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.

Suggested Citation

Boyd, John H. and Hu, Jian and Jagannathan, Ravi, The Stock Market's Reaction to Unemployment News: 'Why Bad News is Usually Good for Stocks' (December 2002). EFA 2003 Annual Conference Paper No. 699. Available at SSRN: https://ssrn.com/abstract=423982 or http://dx.doi.org/10.2139/ssrn.423982

John H. Boyd (Contact Author)

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States
612-624-1834 (Phone)

Jian Hu

Moody's Investors Service ( email )

7 World Trade Center
250 Greenwich Street
New York, NY 10007
United States
212.553.7855 (Phone)

Ravi Jagannathan

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
429 Andersen Hall
Evanston, IL 60208
United States
847-491-8338 (Phone)
847-491-5719 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 019
India

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