Inflation, Equity Market Volatility, and Bond Prices: Evidence from G7 Countries

Yu-Fen Chen, Thomas Chinan Chiang () and Fu-Lai Lin
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Yu-Fen Chen: Department of Business Administration, Da-Yeh University, 168 University Rd., Dacun, Changhua 51591, Taiwan
Thomas Chinan Chiang: Department of Finance, Drexel University, 3141 Chestnut Street, Philadelphia, PA 19104, USA
Fu-Lai Lin: Department of Finance, Da-Yeh University, 168 University Rd., Dacun, Changhua 51591, Taiwan

Risks, 2023, vol. 11, issue 11, 1-22

Abstract: This study examines the impacts of the US inflation rate on the bond prices of G7 countries across different maturities using inflation-induced equity market volatility (EMV) to better account for bond price determinants. The regression model, a GED-GARCH (1,1) procedure, is adopted to deal with the volatility clustering and fat tail features in bond return estimation. The testing results indicate that the inflation rate has a negative effect on bond returns across different maturities, although an exception occurs for longer maturities in Japan. Evidence shows that US inflation has a significant impact on bond returns for the non-US G7 countries. The negative effects from US inflation are more profound than those from the domestic market (expect in Japan). This study introduces the equity market volatility arising from inflation or the Fed’s interest rate change; this variable produces market volatility that has a positive effect on bond returns, offsetting part of the original negative effect from a rise in inflation.

Keywords: inflation; bond prices; volatility; Fisher hypothesis; stock price; Fed policy (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:gam:jrisks:v:11:y:2023:i:11:p:191-:d:1271970

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