The Unassuming Economist

From a new paper on the effects of stock market dispersion:

“We study the extent to which stock market dispersion is related to unemployment and output growth for 16 countries over 20 years. Using panel vector-auto-regressions and panel dynamic regressions, we find increases in stock market dispersion across industries to induce future increases in unemployment and
future decreases in industrial production (IP) growth. Moreover, the responses of unemployment and IP growth following a positive shock to stock market dispersion are persistent and are robust to various controls, sample periods, and estimation methods. Our article provides cross-country evidence in support of the hypothesis that shifts in demand across industries negatively affect employment.”

“We present the impulse responses of the unemployment rate and the change in the interest rate to a positive one-standard-deviation shock to stock market dispersion in the upper subfigure of Figure 2. […] Overall, we find an increase in stock market dispersion to have a negative impact on the labor market in the short term, as evidenced by the positive response of the unemployment rate. Specifically, the unemployment rate increases by 0.02% following a positive one-standard-deviation shock to stock market dispersion. This increase peaks after the seventh month and gradually fades away after 15–20 months. Despite its modest magnitude at peak (0.02%), the impact of stock market dispersion on the unemployment rate is relatively long-lived, with the responses lasting beyond the 20-month horizon. Our result is consistent with previous studies that use U.S. data (e.g., Loungani, Rush, and Tave 1990, and more recently Angelidis, Sakkas, and Tessaromatis 2015) in the sense that unemployment significantly depends on the lags of stock market dispersion.”