Stock prices–inflation puzzle and the predictability of stock market returns

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

“…Another reason could be that investors in India have an inflation expectation, and thereby want more return for their investment in the market to compensate for an increase in expected risk. This is consistent with the study done by Boucher (2006), who indicates that when inflation increases, the price-earnings ratio declines and expected market return rises. This increase in expected return leads to higher share prices.…”

Price-earnings changes during US presidential election cycles: voter uncertainty and other determinants

“…This result documents a well-known anomaly that continues to be noted in the literature: over short time horizons and in environments of low or moderate inflation, asset valuations based on nominal future cash flows fall in response to increased inflation (see Boucher 2006;Boyd et al 2001).…”

“…Jain and Rosett (2006) include this variable, although they do not find an impact of inflation on P/E. As noted above, previous literature has suggested that over short time horizons and in environments of low or moderate inflation, asset valuations based on nominal future cash flows fall in response to increased inflation (see Boucher 2006 andBoyd et al 2001). As noted by Cohen et al (2005), if stock valuation is based on nominal cash flows, then it is irrational for stock prices to fall with inflation.…”

Booms and Busts in China’s Stock Market: Estimates Based on Fundamentals

“…Earnings are preferred to dividends as longer time series of earnings than dividends are available for China and because dividend payments are, in contrast to earnings, sensitive to the dividend payout, share buyback and tax policies. Following Boucher (2006), the modified log linear Campbell-Shiller model can be rewritten as:…”