Stock returns and inflation: a macro analysis
AbstractA negative relationship between stock returns and (expected) inflation is frequently observed in empirical work and is considered a puzzle since it is expected that stocks are a good hedge against inflation, so that their real rate of return (actual or expected) ought to be unaffected by changes in inflation. Various attempts have been made to resolve this puzzle empirically but have tended to use single equations of a partial equilibrium nature which have been ad hoc to a greater or lesser extent. This paper examines the puzzle in the framework of a small empirical macroeconomic model. The negative sign survives the extension to the full model and the source of the puzzle is found in the macroeconomic interactions: a rise in the expected inflation rate raises equilibrium real output which has a negative impact on stock returns.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Taylor and Francis Journals in its journal Applied Financial Economics.
Volume (Year): 7 (1997)
Issue (Month): 2 ()
Contact details of provider:
Web page: http://www.tandf.co.uk/journals/routledge/09603107.html
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Flavin, Thomas & Wickens, Michael R, 2002.
"Macroeconomic Influences on Optimal Asset Allocation,"
CEPR Discussion Papers
3144, C.E.P.R. Discussion Papers.
- Flavin, T. J. & Wickens, M. R., 2003. "Macroeconomic influences on optimal asset allocation," Review of Financial Economics, Elsevier, vol. 12(2), pages 207-231.
- Thomas J. Flavin & Michael R. Wickens, 2001. "A Risk Management Approach to Optimal Asset Allocation," Economics, Finance and Accounting Department Working Paper Series n1080301, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
- 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.
- Rudra P. PRADHAN & Mak B. ARVIN & Bele SAMADHAN & Shilpa TANEJA, 2013. "The Impact of Stock Market Development on Inflation and Economic Growth of 16 Asian Countries: A Panel VAR Approach," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 13(1), pages 203-218.
- Sellin, Peter, 1998. "Monetary Policy and the Stock Market: Theory and Empirical Evidence," Working Paper Series 72, Sveriges Riksbank (Central Bank of Sweden).
- Nicolaas Groenewold, 2004. "Fundamental share prices and aggregate real output," Applied Financial Economics, Taylor and Francis Journals, vol. 14(9), pages 651-661.
- Du, Ding, 2006. "Monetary policy, stock returns and inflation," Journal of Economics and Business, Elsevier, vol. 58(1), pages 36-54.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael McNulty).
If references are entirely missing, you can add them using this form.