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Stock returns, velocity dynamics and inflation volatility

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  • Ky-Hyang Yuhn
  • Sang Bong Kim
  • James Ross McCown

Abstract

Our model relates the variability of stock returns to the variability of consumption velocity and shows that real stock returns tend to co-vary negatively with expected inflation in a period (or regime) of low and stable inflation and to co-vary positively with expected inflation in a period (or regime) of high and volatile inflation. Long-run real stock returns are shown to be positively related to expected inflation. Our empirical results for 20 countries provide consistent support for our propositions, indicating that the standard deviation of the annual inflation rate roughly equal to 10% is the dividing line between negative and positive return-inflation relations.

Suggested Citation

  • Ky-Hyang Yuhn & Sang Bong Kim & James Ross McCown, 2018. "Stock returns, velocity dynamics and inflation volatility," The European Journal of Finance, Taylor & Francis Journals, vol. 24(18), pages 1755-1771, December.
    • Handle: RePEc:taf:eurjfi:v:24:y:2018:i:18:p:1755-1771
    DOI: 10.1080/1351847X.2018.1425731
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    Cited by:

    1. Konrad Farrugia & Janice Duca & Peter J. Baldacchino & Simon Grima, 2021. "The Relationship between Inflation and Stock Returns in a Small Island State: An Analysis," International Journal of Finance, Insurance and Risk Management, International Journal of Finance, Insurance and Risk Management, vol. 11(2), pages 51-78.
    2. Julio Pindado & Ignacio Requejo & Juan C. Rivera, 2020. "Does money supply shape corporate capital structure? International evidence from a panel data analysis," The European Journal of Finance, Taylor & Francis Journals, vol. 26(6), pages 554-584, April.

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