The adjustments of stock prices to information about inflation: evidence from MENA countries

Abstract

This study extends the empirical evidence by analysing the reaction of monthly stock returns to the unexpected portion of CPI inflation rate and by capturing the asymmetric shocks to volatility of unexpected inflation in five MENA countries. Both Threshold GARCH and Exponential GARCH are used to catch the news affect that unexpected inflation may have on stock returns. Results document a negative and strongly significant relationship between unexpected inflation and stock returns in MENA countries. Results also indicate that the stock markets of the listed MENA countries do not feel the high up and down movements in the markets and as such the volatilities. The asymmetric news effect is absent.

Notes

¹ For more detailed specification of EGARCH see Nelson (1990), and Engle and Ng (1993).

² BHHH algorithm follows Newton–Raphson. It replaces the negative of the Hessian by an approximation formed from the sum of the outer product of the gradient vectors for each observation's contribution to the objective function. The Marquardt algorithm modifies the Gauss–Newton algorithm in exactly the same manner as BHHH modifies the Newton–Rapson method. By adding a ridge factor to the Hessian approximation, this correction handles numerical problems when the outer product is near singular and may improve the convergence rate.