Stock returns and inflation expectations: Evidence from 20 major countries

Abstract

We examine the relation between stock market returns and inflation expectations using data for 20 advanced countries. Evidence reveals that a negative relation presents in each of 18 countries; the exceptions are Brazil and Russia. The uncertainty hypothesis is established via evidence that U.S. inflation positively increases equity market volatility (EMV), which has a negative impact on U.S. and global stock returns. Evidence leads to the conclusion that both expected domestic inflation and EMV have adverse impacts on stock returns. The model is robust with different formations of inflation expectations and whether the test equations are examined using nominal or real stock returns.

Keywords

• fama proxy effect
• geske-roll hypothesis
• uncertainty hypothesis
• real stock market returns
• inflation expectations
• monetary policy uncertainty