Explaining the Stock Market's Reaction to Unemployment News Over the Business Cycle

This paper analyzes the impact of unemployment news on stock markets throughout the business cycle. We show dependence of the reaction to the economic environment by studying the reaction in multiple economic environments that are defined based on both the level and momentum of economic activity. Applying the Campbell-Shiller decomposition combined with a VAR model, we attribute the stock market reactions on a daily basis to its main drivers: changes in the risk free rate, risk premium and dividends. The decomposition of daily returns shows that all three drivers are important determinants of announcement returns.