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The Stock Market's Reaction to Unemployment News: Why Bad News Is Usually Good for Stocks
Author(s) -
BOYD JOHN H.,
HU JIAN,
JAGANNATHAN RAVI
Publication year - 2005
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2005.00742.x
Subject(s) - earnings , dividend , economics , equity (law) , unemployment , monetary economics , stock market , stock (firearms) , financial economics , finance , macroeconomics , mechanical engineering , paleontology , horse , biology , political science , law , engineering
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.