The Stock Market's Reaction to Unemployment News, Stock-Bond Return Correlations, and the State of the Economy

Journal of Investment Management, Vol. 4, No. 4, Fourth Quarter 2006

Posted: 29 Nov 2006

See all articles by John H. Boyd

John H. Boyd

University of Minnesota - Twin Cities - Carlson School of Management

Qianqiu Liu

University of Hawaii at Manoa - Shidler College of Business

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

Abstract

We confirmBoyd et al.'s (2005) finding that on average a surprise increase in unemployment is "good news" for stocks during economic expansions and "bad news" during economic contractions. Unemployment news bundles information about future interest rates, equity risk premium, and corporate earnings. For stocks as a group information about interest rates dominates during expansions, and information about future earnings dominates during contractions. Hence, (a) ceteris paribus, the correlation between stock and bond returns will be greater during economic expansions and (b) stock price responses to the unemployment news will convey information about the state of the economy.

Keywords: Stock-bond correlation, unemployment news, stock market reaction, information in macroeconomic announcements, state of the economy

Suggested Citation

Boyd, John H. and Liu, Qianqiu and Jagannathan, Ravi, The Stock Market's Reaction to Unemployment News, Stock-Bond Return Correlations, and the State of the Economy. Journal of Investment Management, Vol. 4, No. 4, Fourth Quarter 2006. Available at SSRN: https://ssrn.com/abstract=947887

John H. Boyd

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

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

Qianqiu Liu (Contact Author)

University of Hawaii at Manoa - Shidler College of Business ( email )

2404 Maile Way, E602f
Honolulu, HI 96822
United States
808-956-8736 (Phone)
808-956-9887 (Fax)

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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