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Stock returns and inflation in Greece: A Markov switching approach

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  • Hondroyiannis, George
  • Papapetrou, Evangelia

Abstract

The paper studies the dynamic relationship between real stock returns and expected and unexpected inflation utilizing a Markov Switching vector autoregressive model (MS‐VAR). The MS‐VAR model has the advantage that it is able to capture the dependence structure of the series both in terms of mean and variance. Univariate and multivariate innovation decompositions are employed to separate inflation into two components, the expected and unexpected. The empirical evidence suggests that real stock returns are not related to expected and unexpected inflation and this result is independent of the method used to separate inflation into the two components. Rather, the results suggest that stock market movements are regime dependent, implying that stock market performance is not predictable.
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  • Hondroyiannis, George & Papapetrou, Evangelia, 2006. "Stock returns and inflation in Greece: A Markov switching approach," Review of Financial Economics, Elsevier, vol. 15(1), pages 76-94.
    • Handle: RePEc:eee:revfin:v:15:y:2006:i:1:p:76-94
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    9. Janor, Hawati & Rahim, Ruzita & Yaacob, Mohd & ibrahim, izani, 2010. "Stock Returns and Inflation with Supply and Demand Shocks: Evidence from Malaysia," Jurnal Ekonomi Malaysia, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, vol. 44, pages 3-10.
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