Swedish stock market reactions to unemployment news in a state dependent model

Abstract

The thesis sets out to test the relation of unemployment rate, stock market index returns, and economic state in Sweden. The research questions that will be investigated are “Does unexpected unemployment news predict stock returns in the Swedish stock market?” and “Does the state of the economy have a meaningful impact on how the market reacts to good or bad news?”. The thesis uses a linear-regression model to test this relationship via multiple recession-prediction models built on historic macroeconomic relevant data. Furthermore a forecast for unemployment is created to represent market sentiment during announcements of unemployment news. As such, if the unemployment rate holds predictive power of the stock market during different states of the economy, unexpected unemployment at announcement days should generate abnormal returns. The thesis finds no statistically significant relationship between unexpected unemployment rate, state of the economy, and stock market returns. The thesis concludes by discussing whether the effect exists in the Swedish stock market or if the lack of significance is a result of limited data or impaired methodology.