BUSINESS-CYCLE ASYMMETRY AND THE STOCK-MARKET

We present and estimate models of an asymmetric relationship between C RSP stock index returns and the U.S. unemployment rate. Based on the A kaike Information Criterion, conventional linear time series models ar e improved by allowing asymmetric responses. Our results show that neg ative stock returns are quickly followed by sharp increases in unemplo yment, while more gradual unemployment declines follow positive stock returns. According to our forecasting model, the unemployment rate ris es by 1.12 percentage points during the 12 months offer a 10 percent s tock decline. Because macroeconomic forecasters have been unable to re liably predict downturns, these findings may provide a useful contribu tion.