Causal relationships between stock returns and inflation

Keun Yeong Lee

Applied Economics Letters, 2008, vol. 15, issue 2, pages 125-129

Abstract: This article studies correlations and dynamic interactions between real stock returns and inflation in the UK for 1830-2000. The BLS test suggests that an endogenous break point exists in 1970, and therefore the pre- and post-break periods are required to be analysed separately. According to the empirical results, for the post-break period, unpredictable stock returns present little correlation to unpredictable inflation, and an increase in stock returns has an insignificant effect on inflation. Impulse response analyses also demonstrate that a positive shock to inflation does not have a negative impact on stock returns. These results are in contrast to the well-known empirical results for the pre-break period.

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