Inflation and Stock Market Returns:Some Australian Evidence

Anthony Saunders and Richard B. Tress

The Economic Record, 1981, vol. 57, issue 1, 58-66

Abstract: This paper analyzes the relationship between Australian stock returns and inflation over the period 1965‐79. The effects of inflation in a ‘rational investor’ valuation framework are discussed. Empirical tests suggest that nominal stock returns and inflation are related in a significantly negative fashion, implying that stocks have been extremely poor inflationary hedges for the investor over the period. In addition, Granger‐Sims tests of causality indicate a mainly unidirectional relationship between inflation and stock returns, with price level charges leading the equity index in time.

Date: 1981
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