The reaction of stock market returns to anticipated unemployment

Jesus Gonzalo and Abderrahim Taamouti

UC3M Working papers. Economics from Universidad Carlos III de Madrid. Departamento de Economía

Abstract: We empirically investigate the short-run impact of anticipated and unanticipated unemployment rates on stock prices. We particularly examine the nonlinearity in stock market's reaction to unemployment rate and study the effect at each individual point (quantile) of stock return distribution. Using nonparametric Granger causality and quantile regression based tests, we find that, contrary to the general findings in the literature, only anticipated unemployment rate has a strong impact on stock prices. Quantile regression analysis shows that the causal effects of anticipated unemployment rate on stock return are usually heterogeneous across quantiles. For quantile range (0.35, 0.80), an increase in the anticipated unemployment rate leads to an increase in the stock market price. For the other quantiles the impact is statistically insignificant. Thus, an increase in the anticipated unemployment rate is in general good news for stock prices. Finally, we offer a reasonable explanation of why unemployment rate should affect stock prices and how it affects them. Using Fisher and Phillips curve equations, we show that high unemployment rate is followed by monetary policy action of Federal Reserve (Fed). When unemployment rate is high, the Fed decreases the interest rate, which in turn increases the stock market prices.

Keywords: Stock; market; returns; anticipated; unemployment; unanticipated; unemployment; nonparametric; tests; conditional; independence; Granger; causality; in; distribution; Granger; causality; in; quantile; local; bootstrap; monetary; policy; Federal; funds; rate; money; supply (search for similar items in EconPapers)
JEL-codes: C14 C58 E44 G12 (search for similar items in EconPapers)
Date: 2012-07-06
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: The reaction of stock market returns to anticipated unemployment (2011)
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