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STOCK MARKET REACTION TO GOOD AND BAD INFLATION NEWS
Author(s) -
Knif Johan,
Kolari James,
Pynnönen Seppo
Publication year - 2008
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.2008.00235.x
Subject(s) - economics , stock (firearms) , monetary economics , stock market , inflation (cosmology) , real interest rate , economic stability , financial economics , monetary policy , macroeconomics , mechanical engineering , paleontology , physics , horse , theoretical physics , engineering , biology
This article shows that differentiating between good and bad inflation news is important to understanding how inflation affects stock market returns. Summing positive and negative inflation shocks as in previous studies tends to wash out or mute the effects of inflation news on stock returns. More specifically, we find that, depending on the economic state, positive and negative inflation shocks can produce a variety of stock market reactions. We conclude that the effect of inflation on stock returns is conditional on whether investors perceive inflation shocks as good or bad news in different economic states.