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Inflation news and stock returns: market direction and flow-through ability

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  • Antonio Díaz
  • Francisco Jareño

Abstract

Previous studies of the short-run response of daily stock prices to announcements of macroeconomic news could be biased when responses in different scenarios cancel each other out. In our analysis of inflation news in the Spanish stock market, we consider market direction arguments and implement our study based on the sector of activity to control for the ‘flow-through’ ability of the firms in each industry. In general, our results are quite consistent with the ‘market direction’ and the ‘flow-through’ hypotheses. Unanticipated inflation news implies abnormal returns depending on the direction of the news, the state of the economy and the flow-through ability of the sector. The impact of positive surprises affects the abnormal returns of many more sectors than does the impact of negative surprises, especially in the low states of economy. These significant effects are mainly observed in industries that are characterised by low flow-through ability. Copyright Springer-Verlag 2013

Suggested Citation

  • 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.
    • Handle: RePEc:spr:empeco:v:44:y:2013:i:2:p:775-798
    DOI: 10.1007/s00181-012-0555-7
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    More about this item

    Keywords

    Inflation announcement; Stock return; Flow-through ability; Market direction hypothesis; E31; G12; G30; L2;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

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