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Stock returns and inflation: a covariance decomposition

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  • Sangyong Joo

Abstract

The paper introduces the concept of covariance decomposition in a vector autoregression system. It is applied to the negative relationship between real stock returns and inflation in the postwar United States, and examine whether monetary policy accounts for the negative covariance. When the Federal funds rate is used to identify changes in monetary policy, for the 1959-1990 sample, about 30% of the observed negative covariance is attributable to monetary shocks.

Suggested Citation

  • Sangyong Joo, 2000. "Stock returns and inflation: a covariance decomposition," Applied Economics Letters, Taylor & Francis Journals, vol. 7(4), pages 233-237.
    • Handle: RePEc:taf:apeclt:v:7:y:2000:i:4:p:233-237
    DOI: 10.1080/135048500351573
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    References listed on IDEAS

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    Cited by:

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    2. Umut Akovali, 2020. "Beyond Connectedness: A Covariance Decomposition based Network Risk Model," Koç University-TUSIAD Economic Research Forum Working Papers 2003, Koc University-TUSIAD Economic Research Forum.
    3. Theophano Patra & Sunil Poshakwale, 2006. "Economic variables and stock market returns: evidence from the Athens stock exchange," Applied Financial Economics, Taylor & Francis Journals, vol. 16(13), pages 993-1005.

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