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Stock Returns as Predictors of Interest Rates and Inflation


  • Titman, Sheridan
  • Warga, Arthur


This study examines whether stock returns provide forecasts of changes in interest rates and inflation. In contrast to earlier work that indicated that changes in expected inflation negatively affect stock returns, we find a statistically significant positive relation between stock returns and future inflation rate changes as well as a significant positive relation between stock returns and future interest rate changes. Real estate investment trusts, which are particularly interest- and inflation-sensitive securities, provide better forecasts than a broad market index. Finally, we find that most of the evidence supporting the forecasting ability of stock returns occurs in the October 1979 to October 1982 period when the Federal Reserve Board chose not to counteract interest rate changes.

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  • Titman, Sheridan & Warga, Arthur, 1989. "Stock Returns as Predictors of Interest Rates and Inflation," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(01), pages 47-58, March.
  • Handle: RePEc:cup:jfinqa:v:24:y:1989:i:01:p:47-58_01

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    References listed on IDEAS

    1. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1981. "A Re-examination of Traditional Hypotheses about the Term Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 36(4), pages 769-799, September.
    2. Livingston, Miles B & Jain, Suresh K, 1982. " Flattening of Bond Yield Curves for Long Maturities," Journal of Finance, American Finance Association, vol. 37(1), pages 157-167, March.
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    Cited by:

    1. Hong, Harrison & Torous, Walter & Valkanov, Rossen, 2002. "Do Industries Lead the Stock Market? Gradual Diffusion of Information and Cross-Asset Return Predictability," University of California at Los Angeles, Anderson Graduate School of Management qt6x49x543, Anderson Graduate School of Management, UCLA.
    2. Guan-Ru Chen & Ming-Hung Wu, 2013. "How does Monetary Policy Influence Capital Markets? Using a Threshold Regression Model," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 20(1), pages 31-47, March.
    3. Omran, Mohammed & Pointon, John, 2001. "Does the inflation rate affect the performance of the stock market? The case of Egypt," Emerging Markets Review, Elsevier, vol. 2(3), pages 263-279, September.
    4. Stefanescu, Razvan & Dumitriu, Ramona, 2010. "Impact of the global crisis on the linkages between the interest rates and the stock prices in Romania," MPRA Paper 36716, University Library of Munich, Germany, revised 16 Feb 2011.
    5. Lamont, Owen A., 2001. "Economic tracking portfolios," Journal of Econometrics, Elsevier, vol. 105(1), pages 161-184, November.
    6. Cifter Atilla & Ozun Alper, 2008. "Estimating the Effects of Interest Rates on Share Prices in Turkey Using a Multi-Scale Causality Test," Review of Middle East Economics and Finance, De Gruyter, vol. 4(2), pages 68-79, April.
    7. Azzam, Islam, 2010. "Stock exchange demutualization and performance," Global Finance Journal, Elsevier, vol. 21(2), pages 211-222.
    8. Lekkos, Ilias & Milas, Costas, 2004. "Time-varying excess returns on UK government bonds: A non-linear approach," Journal of Banking & Finance, Elsevier, vol. 28(1), pages 45-62, January.
    9. Christopher T. Downing & Francis A. Longstaff & Michael A. Rierson, 2012. "Inflation Tracking Portfolios," NBER Working Papers 18135, National Bureau of Economic Research, Inc.
    10. Bruno, Salvatore & Chincarini, Ludwig, 2010. "A historical examination of optimal real return portfolios for non-US investors," Review of Financial Economics, Elsevier, vol. 19(4), pages 161-178, October.
    11. William Hardin & Xiaoquan Jiang & Zhonghua Wu, 2012. "REIT Stock Prices with Inflation Hedging and Illusion," The Journal of Real Estate Finance and Economics, Springer, vol. 45(1), pages 262-287, June.
    12. Kosmas Njanike & Pension Katsuro & Michael Mudzura, 2009. "Factors Influencing the Zimbabwe Stock Exchange Performance (2002-2007)," Annals of the University of Petrosani, Economics, University of Petrosani, Romania, vol. 9(2), pages 161-172.
    13. Byun, Jong-Cook & Chen, Son-Nan, 1996. "International real interest rate parity with error correction models," Global Finance Journal, Elsevier, vol. 7(2), pages 129-151.
    14. Wei-han Liu & Zhefang Zhou, 2009. "Inflation-hedging Behavior of a Securitized Real Estate Market," International Real Estate Review, Asian Real Estate Society, vol. 12(3), pages 221-251.

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