The Adjustment of Stock Prices to Information About Inflation

Schwert, G. William

doi:10.1111/j.1540-6261.1981.tb03531.x

Cited by 283 publications

(185 citation statements)

References 17 publications

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“…In an environment of inflation, companies cannot think about their future, manufacturers keep on increasing prices, investments decline and financial institutions suffer. According to Schwert (1981), stock market showed a negative reaction to the announcement of unexpected inflation although the magnitude of reaction was not so great. Modigliani and Cohn (1979) found that investors hesitate to invest in an environment of inflation because they get uncertain about future cash flows.…”

Section: Introductionmentioning

confidence: 99%

Inflation and Dividend Behavior of Pakistani Firms: An Empirical Investigation Using ARDL

Ghafoor

Khan²,

Shah³

et al. 2014

IJBM

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The purpose of this study is to examine the dividends behavior of Pakistani firms by taking a macroeconomic perspective. In doing that inflation and real growth are also considered. The paper examines the relationship between dividend yield, return on equity, real growth and inflation in the Pakistan by applying ARDL approach which is used to examine the relationship in the long run. Moreover, VECM is also applied to capture the short run impact. Results of ARDL revealed a positive relationship between inflation and dividend payments, which can be interpreted in two ways. First, inflation affects revenues and variable cost not the fixed cost; it simply increases the nominal value of corporate earnings and therefore dividend payouts, and second is that managers may try to pursue a dividend policy, which is considered to be optimal, believing that there is a desirable level of real dividend income to be paid to their investors. The results of ARDL approach show that inflation, in long term as well as in short run have positive relationship with dividends while return on equity and real growth rates showed insignificant relationship with dividend yield in both long and short run. The estimated equation remains stable over the period of study as indicated by CUSUM and CUSUMQ stability tests. This study is helpful for various investors in deciding for investment when they have fear of considerable acceleration of inflationary pressure. For example they can protect themselves against accelerating inflation rates when buying the stocks. While formulating an optimal dividend policy of the firm, managers should carefully examine the inflationary environment.

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Section: Introductionmentioning

confidence: 99%

Inflation and Dividend Behavior of Pakistani Firms: An Empirical Investigation Using ARDL

Ghafoor

Khan²,

Shah³

et al. 2014

IJBM

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“…The systematic relationship between the surprise component of macroeconomic data releases and one-day exchange rate changes is weak and hard to detect (Hardouvelis 1 The literature measuring the effects of macro announcements on asset prices at daily or intradaily frequency is vast and includes Dornbusch (1980), Schwert (1981), Frenkel (1981), Edwards (1982), Cornell (1983), Pearce and Roley (1983), Frankel and Engel (1984), Ito and Roley (1987), Hardouvelis (1988), Cutler, Poterba and Summers (1989), McQueen and Roley (1993), Ederington and Lee (1993), Edison (1997), Remolona (1997, 1999), Almeida, Goodhart and Payne (1998), Bollerslev, Cai and Song (2000), Clare and Courtney (2001), Kuttner (2001), Ehrmann and Fratzscher (2002), Gurkaynak, Sack and Swanson (2003) and Bernanke and Kuttner (2003). Some of these papers also document a systematic relationship between the announcements and the conditional variance of asset returns.…”

Section: Introductionmentioning

confidence: 99%

The high-frequency response of exchange rates and interest rates to macroeconomic announcements

Faust

Rogers

Wang

et al. 2007

Journal of Monetary Economics

376

193

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The joint movements of exchange rates and U.S. and foreign term structures over short-time windows around macro announcements are studied using a 14-year span of high-frequency data. In order to evaluate whether the joint effects can be reconciled with conventional theory, the implications of these joint movements for changes in expected future exchange rates and changes in foreign exchange risk premia are deduced. For several real macro announcements, a stronger than expected release appreciates the dollar today, and must either (i) lower the risk premium for holding foreign currency rather than dollars, or (ii) imply net expected dollar depreciation over the ensuing decade. Abstract: Many recent papers have studied movements in stock, bond, and currency prices over short windows of time around macro announcements. This paper adds to the announcement effects literature in two ways. First, we study the joint announcement effects across a broad range of assets--exchange rates and U.S. and foreign term structures. In order to evaluate whether the joint effects can be reconciled with conventional theory, we interpret the joint movements in light of uncovered interest rate parity or changes in risk premia. For several real macro announcements, we find that a stronger than expected release appreciates the dollar today, but that it must either (i) lower the relative risk premium for holding foreign currency rather than dollars, or (ii) imply considerable future expected dollar depreciation. The latter implies an overshooting behavior akin to that described by Dornbusch (1976). Second, we use a longer span of high frequency data than has been common in announcement work. A longer span of high frequency data contributes to the precision of our estimates and allows us to explore the possibility that the effects of macro surprises on asset prices have varied over time. We find evidence, for example, that PPI releases had a larger effect on U.S. interest rates before about 1992 than subsequently.

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“…For example. Schwert (1981) examines the reaction of stock prices to the announcement of inflation data: Fama. et.…”

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confidence: 99%

“…There is, however, some evidence of a different effect of positive surprises across the different policy regimes. 'As Sheehan (1985) notes, the unexpected change in the money stock provides new information about money stock developments that already have occurred. That is because the money stock is announced with a lag.…”

mentioning

confidence: 99%

“…For a more recent study of the effects of intlation On bank stock prices, used to represent a group of net monetary creditors, see Santoni (1986). "For example, Feldstein (1980) discusses the effect of taxes: Schwert (1981), Fama and Schwert (1977) and Nelson (1976) examine the inflation'stock price relationship for the United States while Branch (1974) and Cohn and Lessard (1981) provide evidence from other countries, In general, these studies indicate that unexpected increases in inflation lower stock prices. Results reported in Kool and Hater (1986), however, suggest that this result does not hold for earlier time periods. "…”

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confidence: 99%

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The Response of Stock Prices to Changes in Weekly Money and the Discount Rate

Hafer¹

1986

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I~ON~tfllRAhI I fl St tidi hIS hr Iii di~ott tl to in alvzing the effects of weekly changes in the ii onev stock (MI on interest rates~md exchange rates,' lit general, the its tilts of this research are consis tent with the efficient markets hypothesis, whici holds that only unexpected changes in the rrionev stock should significantly affect interest rates and exchange 'a tes.' Few ofthese studies how ever' have investigated the reaction of stock prices to the tveeklv money announcetnent: the purpose ol this article is to prosome evtdence on this effect.P. V/ Hater is a research officer at the Federal Reserve Bank of St. Louis. The author would like to thank

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The Adjustment of Stock Prices to Information About Inflation

Cited by 283 publications

References 17 publications

Inflation and Dividend Behavior of Pakistani Firms: An Empirical Investigation Using ARDL

Inflation and Dividend Behavior of Pakistani Firms: An Empirical Investigation Using ARDL

The high-frequency response of exchange rates and interest rates to macroeconomic announcements

The Response of Stock Prices to Changes in Weekly Money and the Discount Rate

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