The reaction of stock market returns to unemployment
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Jesús Gonzalo
Abstract
We empirically investigate the short-run impact of anticipated and unanticipated unemployment rates on stock prices. We particularly examine the nonlinearity in the stock market’s reaction to the unemployment rate and study the effect at each individual point (quantile) of the stock return distribution. Using nonparametric Granger causality and quantile regression-based tests, we find that 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 returns are usually heterogeneous across quantiles. For the quantile range 0.35, 0.80, an increase in the anticipated unemployment rate leads to an increase in stock market prices. For other quantiles, the impact is generally statistically insignificant. Thus, an increase in the anticipated unemployment rate is, in general, good news for stock prices. Finally, we offer a reasonable explanation for the reason, and manner in which, the unemployment rate affects stock market prices. Using the Fisher and Phillips curve equations, we show that a high unemployment rate is followed by monetary policy action of the Federal Reserve (Fed). When the unemployment rate is high, the Fed decreases the interest rate, which in turn increases the stock market prices.
Acknowledgements
We thank the Editor-in-Chief Prof. Bruce Mizrach and two anonymous referees for their very useful comments. The authors also thank Jean-Marie Dufour, Barbara Rossi, and Enrique Santana for their several useful comments. Earlier versions of this paper were presented at the 65th European Meeting of the Econometric Society in Oslo (2011), the NBER -- NSF Time Series Conference in Michigan (2011), the XXVI Simposio of the Spanish Economic Association (SAEe) in Malaga (2011), and the 4th International IFABSB conference on Rethinking Banking and Finance: Money, Markets and Models in Valencia (2012). Financial support from the Spanish MINECO (grants ECO2013-46395 and ECO2016-78652) and Maria de Maeztu (grant MDM 2014-0431), Bank of Spain (ER grant program), and MadEco-CM (grant S2015/HUM-3444) is gratefully acknowledged. Some results of this paper were obtained when A. Taamouti was at Universidad Carlos III de Madrid.
A Additional empirical results of using changes in unemployment rate
This figure illustrates the coefficient estimates and p-values for the statistical significance of the causal impact of the anticipated component of changes in unemployment rate on the quantiles of stock market returns. The results correspond to the quantile regressions in 19, but the growth rate of unemployment is replaced by the changes in unemployment rate. The sample covers the period from January 1950 to September 2014. A) Coefficient; B) p-value.
This figure illustrates the coefficient estimates and p-values for the statistical significance of the causal impact of the unanticipated component of changes in unemployment rate on the quantiles of stock market returns. The results correspond to the quantile regressions in 19, but the growth rate of unemployment is replaced by the changes in unemployment rate. The sample covers the period from January 1950 to September 2014. A) Coefficient; B) p-value.
This figure illustrates the coefficient estimates and p-values for the statistical significance of the causal impact of changes in unemployment rate on the Federal funds rate. The sample covers the period from July 1954 to September 2014. A) Coefficient; B) p-value.
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Supplemental Material
The online version of this article offers supplementary material (DOI: https://doi.org/10.1515/snde-2015-0078).
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Artikel in diesem Heft
- Nonstationary autoregressive conditional duration models
- Detecting time variation in the price puzzle: a less informative prior choice for time varying parameter VAR models
- The reaction of stock market returns to unemployment
- Using the hybrid Phillips curve with memory to forecast US inflation
- Time-varying persistence of inflation: evidence from a wavelet-based approach
- Asymmetric exchange rate exposure of stock returns: empirical evidence from Chinese industries
Artikel in diesem Heft
- Nonstationary autoregressive conditional duration models
- Detecting time variation in the price puzzle: a less informative prior choice for time varying parameter VAR models
- The reaction of stock market returns to unemployment
- Using the hybrid Phillips curve with memory to forecast US inflation
- Time-varying persistence of inflation: evidence from a wavelet-based approach
- Asymmetric exchange rate exposure of stock returns: empirical evidence from Chinese industries
