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



  • JIAN HU,


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    • Carlson School of Management, University of Minnesota, Moody's Investors Service, Kellogg Graduate School of Management, Northwestern University and National Bureau of Economic Research. The authors benefited from comments by workshop participants at the June 2001 European Financial Management Meetings at Lugano, Federal Reserve Bank of New York, Federal Reserve Bank of Atlanta, McGill University, University of Akron, University of Vienna, and from comments by Olivier Blanchard, Jacob Boudoukh, Ross Levine, Roberto Rigobon, two anonymous referees, and the editor of the journal. We particularly benefited from discussions with Gordon Alexander and Sergio Rebelo. We are grateful to Bhaskaran Swaminathan for providing us with monthly data on the intrinsic value to market value ratios for the Dow 30 Index. Qianqiu Liu provided valuable research assistance. Any views expressed in the paper are those of the authors and are not necessarily those of the institutions they represent.


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.