 Stock returns and inflation shocks in weaker economic timesRobert A. Connolly, Chris Stivers and Licheng Sun Financial Management, 2022, vol. 51, issue 3, 827-867 Abstract: We show that the concurrent relation between quarterly stock returns and inflation shocks is economically and robustly significant only over weaker economic (WE) times, strongly negative prior to the late 1990s, and strongly positive afterwards. Conversely, in the stronger economic times over our 1981 to 2017 sample, this stock‐inflation relation is relatively much smaller and usually marginally negative. Our evidence suggests a role for two complementary channels. First, we find consistent state‐dependent patterns in how inflation shocks are related to expected economic growth and the equity risk premium, indicating that inflation nonneutrality is stronger over WE times. Second, our findings imply that the inflation signal about the underlying economic state intensifies during WE times, due to the elevated economic‐state uncertainty then. We also contribute by contrasting subjective (survey‐based) versus objective inflation shocks and by evaluating the relation between inflation shocks and forward equity yields. Date: 2022 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:bla:finmgt:v:51:y:2022:i:3:p:827-867 Ordering information: This journal article can be ordered from Access Statistics for this article Financial Management is currently edited by William G. Christie More articles in Financial Management from Financial Management Association International Contact information at EDIRC. |
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