The relationship between stock returns and inflation in four European markets

Abstract

We study the effects of expected and unexpected inflation on real stock returns for France, Germany, Italy and the UK. We find evidence that unexpected inflation affects stock returns in France, Italy and the UK, but that expected inflation does not. Unexpected interest rates also affect real stock returns in the three countries. However, we find no evidence of these variables affecting real stock returns in Germany.

Notes

¹ A rough variant and predecessor of this methodology appears in Caporale and Jung (1997).

² The residuals of the estimated ARI models in Equations 1–3 are white noise. We do not show the estimates here, but they are available upon request.