Inflation and Rates of Return on Common Stocks

Nelson, Charles R.

doi:10.2307/2326618

Cited by 216 publications

(171 citation statements)

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“…Inflation could indicate less unemployment and higher output and income leading to higher stock prices. The positive relationship between inflation and stock market returns in China supports Nelson's (1976) claimed that correlation between current nominal returns and one-period lagged inflation should be direct due to the positive relationship between past and expected inflation rates. Based on equilibrium models, correlation between price volatility and equity returns depend on the source of change in inflation (monetary or real).…”

Section: Cointegraion and Vecm Results-case Of Chinamentioning

confidence: 54%

The Role of Macroeconomic Variables on Stock Market Index in China and India

Hosseini¹,

Ahmad²,

Lai³

2011

IJEF

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This paper investigates the relationships between stock market indices and four macroeconomics variables, namely crude oil price (COP), money supply (M2), industrial production (IP) and inflation rate (IR) in China and India. The period covers in this study is between January 1999 to January 2009. Using the Augmented Dickey-Fuller unit root test, the underlying series are tested as non-stationary at the level but stationary in first difference. The use of Johansen-Juselius (1990) Multivariate Cointegration and Vector Error Correction Model technique, indicate that there are both long and short run linkages between macroeconomic variable and stock market index in each of these two countries.

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Section: Cointegraion and Vecm Results-case Of Chinamentioning

confidence: 54%

The Role of Macroeconomic Variables on Stock Market Index in China and India

Hosseini¹,

Ahmad²,

Lai³

2011

IJEF

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“…In order to test the effects of unexpected inflation, a model for expected inflation is necessary. Two models for expected inflation have been used to analyze the effects of unexpected inflation on stock returns: (1) Nelson [17] and Bodie [3] use extrapolative time series models to predict inflation; and (2) Jaffe and Mandelker [14] and Fama and Schwert [10] follow Fama [7] in using the short-term interest rate as a predictor of inflation. Nelson…”

Section: A Models For Expected Inflationmentioning

confidence: 99%

“…In this model, all of the new information about future inflation rates which becomes available at time t is contained in the unexpected inflation rate. Nelson [17] uses a similar time series model for the C.P.I. inflation rate to examine the effect of unexpected inflation on the monthly returns to the Standard and Poor's composite portfolio.…”

Section: A Models For Expected Inflationmentioning

confidence: 99%

The Adjustment of Stock Prices to Information About Inflation

Schwert¹

1981

The Journal of Finance

283

171

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This paper analyzes the reaction of stock prices to the new information about inflation. Based on daily returns to the Standard and Poor's composite portfolio from 1953–78, it seems that the stock market reacts negatively to the announcement of unexpected inflation in the Consumer Price Index (C.P.I.), although the magnitude of the reaction is small. It is interesting to note that the stock market seems to react at the time of announcement of the C.P.I., approximately one month after the price data are collected by the Bureau of Labor Statistics.

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“…(p. 366). In contrast, Bodie [2], Jaffe and Mandelker [11], and Nelson [17] found that the real rate of return on common stocks declined substantially in the last two decades. Given these empirical findings our model would suggest that inflation enhanced firms' demand for investment.…”

Section: Discussionmentioning

confidence: 99%

The Irrelevance of Capital Structure for the Impact of Inflation on Investment

Hochman¹,

Palmon²

1983

The Journal of Finance

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Studies concerning the effect of inflation on firms' investment decisions suggest that the form of financing is relevant in assessing the effect of inflation on investment. This paper demonstrates that when the equilibrium relationship between market rates of return on bonds and stocks is considered, the effect of inflation on investment is independent of the capital structure. The paper also shows that when the ‘Fisher effect’ is assumed to hold, the cut‐off rate of return on investment declines with anticipated inflation independently of the financing. However, if the real interest rate rises with inflation, inflation may increase the cut‐off rate.

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Inflation and Rates of Return on Common Stocks

Cited by 216 publications

References 0 publications

The Role of Macroeconomic Variables on Stock Market Index in China and India

The Role of Macroeconomic Variables on Stock Market Index in China and India

The Adjustment of Stock Prices to Information About Inflation

The Irrelevance of Capital Structure for the Impact of Inflation on Investment

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