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Stock Market Reaction To Good And Bad Inflation News

Author

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  • Johan Knif
  • James Kolari
  • Seppo Pynnönen

Abstract

This article shows that differentiating between good and bad inflation news is important to understanding how inflation affects stock market returns. Summing positive and negative inflation shocks as in previous studies tends to wash out or mute the effects of inflation news on stock returns. More specifically, we find that, depending on the economic state, positive and negative inflation shocks can produce a variety of stock market reactions. We conclude that the effect of inflation on stock returns is conditional on whether investors perceive inflation shocks as good or bad news in different economic states.

Suggested Citation

  • Johan Knif & James Kolari & Seppo Pynnönen, 2008. "Stock Market Reaction To Good And Bad Inflation News," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 31(2), pages 141-166, June.
    • Handle: RePEc:bla:jfnres:v:31:y:2008:i:2:p:141-166
    DOI: 10.1111/j.1475-6803.2008.00235.x
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