The Relationship between Inflation and Stock Returns in a Small Island State: An Analysis

Konrad Farrugia, Janice Duca, Peter J. Baldacchino and Simon Grima

International Journal of Finance, Insurance and Risk Management, 2021, vol. 11, issue 2, 51-78

Abstract: Purpose: This article lays out an analysis of the relationship between inflation and Maltese monthly stock returns, comprising of 139 observations. Design/Methodology/Approach: A series of statistical tests were used so that the final multivariate time series model – a Vector Error Correction Model, was fitted to the data. The model results were corroborated to the findings from the qualitative data and previous empirical evidence. Findings: Findings indicate that stock returns are positively influenced by the previous month’s returns and negatively influenced by inflation, where the latter factor takes 3 to 4 months to impact stock returns. Additionally, short-term interest rates and money supply seem to contribute indirectly to the negative inflation-stock returns relationship since both variables are statistically significant in explaining inflation. Long-term interest rates and industrial production variables are statistically insignificant in explaining both inflation and stock returns. Findings show that Maltese investors’ focus is on high dividend pay-out and capital preservation.

Keywords: Maltese Stock Market; Stock Returns; Multivariate Time Series Model; Macroeconomic Finance (search for similar items in EconPapers)
JEL-codes: E31 P24 P44 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://journalfirm.com/journal/256/download (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ers:ijfirm:v:11:y:2021:i:2:p:51-78

Access Statistics for this article

More articles in International Journal of Finance, Insurance and Risk Management from International Journal of Finance, Insurance and Risk Management
Bibliographic data for series maintained by Marios Agiomavritis ().