Working Paper: CEPR ID: DP9630
Authors: Roger E. A. Farmer
Abstract: This note shows that a big stock market crash, in the absence of central bank intervention, will be followed by a major recession one to four quarters later. I establish this fact by studying the forecasting ability of three models of the unemployment rate. I show that the connection between changes in the stock market and changes in the unemployment rate has remained structurally stable for seventy years. My findings demonstrate that the stock market contains significant information about future unemployment.
Keywords: Stock Market; Unemployment
JEL Codes: E24; E27; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| stock market crash of 2008 (G01) | Great Recession (G01) |
| significant stock market crash (G01) | major recession (F44) |
| significant stock market crash (G01) | unemployment rate (J64) |
| stock market changes (G10) | unemployment rate (J64) |