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The reaction of stock market returns to unemployment

Author

Listed:
  • Gonzalo Jesús

    (Departamento de Economía Universidad Carlos III de Madrid, Calle Madrid, 126 28903 Getafe (Madrid), España)

  • Taamouti Abderrahim

    (Durham University Business School, Durham University, Mill Hill Lane, Durham, DH1 3LB, UK, Tel: +44-1913345423)

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.

Suggested Citation

  • Gonzalo Jesús & Taamouti Abderrahim, 2017. "The reaction of stock market returns to unemployment," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 21(4), pages 1-20, September.
    • Handle: RePEc:bpj:sndecm:v:21:y:2017:i:4:p:20:n:3
    DOI: 10.1515/snde-2015-0078
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    References listed on IDEAS

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    More about this item

    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;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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