Abstract
Previous studies that examined the relationship between stock returns and inflation have used a symmetric test specification, and have reported evidence of an inverse relation. We use an asymmetric model to re-examine this fundamental relationship between stock returns and inflation. We partition the study period into sub-samples of high and low inflation regimes. An inverse relation between stock returns and inflation forecasts is found during only low inflation periods, while a positive relation is detected through high inflation periods. In combination, results from both high and low inflation regimes suggest that stocks have delivered favorable inflation protection.
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Kolluri, B., Wahab, M. Stock returns and expected inflation: evidence from an asymmetric test specification. Rev Quant Finan Acc 30, 371–395 (2008). https://doi.org/10.1007/s11156-007-0060-9
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DOI: https://doi.org/10.1007/s11156-007-0060-9