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Firm characteristics, unanticipated inflation, and stock returns

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Author Info

  • V. Vance Roley
  • Douglas K. Pearce

Abstract

This paper re-examines the effects of nominal contracts on the relationship between unanticipated inflation and individual stock's rate of return. This study differs in three main ways from previous research. First, announced inflation data are used to examine the effects of unanticipated inflation. Second, a different specification is used to obtain more efficient estimates. Third, additional nominal contracts are considered. The empirical results indicate that time-varying firm characteristics related to inflation predominately determine the effect of unanticipated inflation on a stock's rate of return. A firm's debt-equity ratio appears to be particularly important in determining the response.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Kansas City in its series Research Working Paper with number 88-01.

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Date of creation: 1988
Date of revision:
Handle: RePEc:fip:fedkrw:88-01

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Keywords: Inflation (Finance) ; Stock - Prices;

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Cited by:
  1. Lumpkin, Stephen A. & O'Brien, James M., 1997. "Thrift stock returns and portfolio interest rate sensitivity," Journal of Monetary Economics, Elsevier, vol. 39(2), pages 341-357, July.
  2. Levinsohn, J. & Mackie-Mason, J., 1989. "A Simple, Consistent Estimator For Disturbance Components In Financial Models," Papers 89-16, Michigan - Center for Research on Economic & Social Theory.
  3. Sellin, Peter, 1998. "Monetary Policy and the Stock Market: Theory and Empirical Evidence," Working Paper Series 72, Sveriges Riksbank (Central Bank of Sweden).
  4. Reffett, Kevin L., 1995. "Arbitrage pricing and the stochastic inflation tax in a multisector monetary economy," Journal of Economic Dynamics and Control, Elsevier, vol. 19(3), pages 569-597, April.
  5. Antonio Díaz & Francisco Jareño, 2013. "Inflation news and stock returns: market direction and flow-through ability," Empirical Economics, Springer, vol. 44(2), pages 775-798, April.
  6. Díaz, Antonio & Jareño, Francisco, 2009. "Explanatory factors of the inflation news impact on stock returns by sector: The Spanish case," Research in International Business and Finance, Elsevier, vol. 23(3), pages 349-368, September.
  7. Steven A. Sharpe, 1999. "Stock prices, expected returns, and inflation," Finance and Economics Discussion Series 1999-02, Board of Governors of the Federal Reserve System (U.S.).
  8. Ross Jennings & Gustavo Maturana, 2005. "The Usefulness Of Chilean Inflation Accounting," Abante, Escuela de Administracion. Pontificia Universidad Católica de Chile., vol. 8(1), pages 85-118.
  9. John Ammer, 1994. "Inflation, inflation risk, and stock returns," International Finance Discussion Papers 464, Board of Governors of the Federal Reserve System (U.S.).
  10. Kwon, Chung S. & Shin, Tai S., 1999. "Cointegration and causality between macroeconomic variables and stock market returns," Global Finance Journal, Elsevier, vol. 10(1), pages 71-81.
  11. Grant McQueen & V. Vance Roley, 1990. "Stock Prices, News, and Business Conditions," NBER Working Papers 3520, National Bureau of Economic Research, Inc.

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