TAILIEUCHUNG - THE STOCK MARKET'S REACTION TO UNEMPLOYMENT NEWS: WHY BAD NEWS IS USUALLY GOOD FOR STOCKS

What happens if debt securities are bought for an amount other than par value, for exam- ple, at 98 or 104? The investment is recorded at its cost, which is greater or less than the face amount of the debt. Any premium or discount should be amortized in order to bring the carrying value up (or down) to par value at maturity. Otherwise, a substantial gain or loss will be recognized at maturity. This is particularly true when the investment is a so- called “zero coupon” bond that carries little or no annual cash interest payment. These bonds are purchased at a very low price relative. | NBER WORKING PAPER SERIES THE STOCK MARKET S REACTION TO UNEMPLOYMENT NEWS WHY BAD NEWS IS USUALLY GOOD FOR STOCKS John H. Boyd Ravi Jagannathan Jian Hu Working Paper 8092 http papers w8092 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge MA 02138 January 2001 This version January 2001. The views expressed herein are those of the authors and not necessarily those of the National Bureau ofEconomic Research. 2001 by John H. Boyd Ravi Jagannathan and Jian Hu. All rights reserved. Short sections of text not to exceed two paragraphs may be quoted without explicit permission provided that full credit including notice is given to the source. The Stock Market s Reaction to Unemployment News Why Bad News is Usually Good For Stocks John H. Boyd Ravi Jagannathan and Jian Hu NBER Working PaperNo. 8092 January 2001 JELNo. E3 G1 ABSTRACT w e find that on average an announcement of rising unemployment is good news for stocks during economic expansions and bad news during economic contractions. Thus stock prices usually increase on news of rising unemployment since the economy is usually in an expansion phase. We provide an explanation for this phenomenon. Unemployment news bundles two primitive types of information relevant for valuing stocks information about future interest rates and future corporate earnings and dividends. A rise in unemployment typically signals a decline in interest rates which is good news for stocks as well as a decline in future corporate earnings and dividends which is bad news for stocks. The nature of the bundle - and hence the relative importance of the two effects - changes over time depending on the state of the economy. For stocks as a group and in particular for cyclical stocks information about interest rates dominates during expansions and information about future corporate earnings dominates during contractions. John H. Boyd Department ofFinance University of Minnesota Tel 612 624-1834 Email .

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