The puzzling relationship between stocks return and inflation: a review article

This paper presents a critical review of 158 research articles to explore the relationship between stock return and inflation from 1930 to 2018, which provides a broad literature review and classification scheme. The results show that interest in the topic of inflation–return relation has surged during the above-mentioned period, and it is expected to remain as a prolific area of research in the forthcoming decade. The reviewed papers are classified based on the following themes: the sign of the relation, the geographical area of the study, the approach, and the applied financial methods. The majority of papers have reported the negative relationship between stock return and inflation, which means that the inflation might decrease the real component of stock return. In terms of geographical area, the authors find that the distribution of studies is prominently skewed to the developed economies, but this pattern has changed to a more diversified pattern in recent years. Also, it is found that the results in some of the papers are questionable due to applying inappropriate statistical methods such as linear regression. Finally, this paper suggests that sizable changes must be applied to the current practice of testing the relation between inflation and stock return, in order to develop more valid research. JEL: N20, G10, E31