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Relative Price Variability, Real Shocks, and the Stock Market

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Author Info
 Kaul, Gautam
Seyhun, H Nejat

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Abstract

In this paper, the authors investigate the effects of relative price variability on output and the stock market, and gauge the extent to which inflation proxies for relative price variability in stock-return-inflation regressions. The evidence shows that the negative stock-return-inflation relations proxy for the adverse effects of relative price variability on economic activity, particularly during the 1970s, when the United States experienced oil supply shocks. Hence, it appears that inflation spuriously affects the stock market in two ways: the aggregate output link of E. F. Fama (1981) and the supply shocks reflected in relative price variability. Copyright 1990 by American Finance Association.

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Publisher Info
Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 45 (1990)
Issue (Month): 2 (June)
Pages: 479-96
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Handle: RePEc:bla:jfinan:v:45:y:1990:i:2:p:479-96

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  1. Aktham Maghyereh, 2006. "The long-run relationship between stock returns and inflation in developing countries: further evidence from a nonparametric cointegration test," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 2(4), pages 265-273, July. [Downloadable!] (restricted)
  2. Kilian, Lutz & Park, Cheolbeom, 2007. "The Impact of Oil Price Shocks on the U.S. Stock Market," CEPR Discussion Papers 6166, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  3. Jakob B. Madsen, 2004. "Pitfalls in Estimates of Relationship between Share Returns and Inflation," FRU Working Papers 2004/07, University of Copenhagen. Department of Economics. Finance Research Unit. [Downloadable!]
  4. Martin Hoesli & Colin Lizieri & Bryan MacGregor, 2006. "The Inflation Hedging Characteristics of US and UK Investments: A Multi-Factor Error Correction Approach," Real Estate & Planning Working Papers rep-wp2006-01, School of Business, Reading University. [Downloadable!]
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