Open AccessInflation and Stock Returns at B3
Author(s) -
Carlos Eduardo de Oliveira Chaves,
André C. Silva
Publication year - 2019
Publication title -
revista brasileira de finanças
Language(s) - English
Resource type - Journals
eISSN - 1984-5146
pISSN - 1679-0731
DOI - 10.12660/rbfin.v16n4.2018.77295
Subject(s) - economics , stock (firearms) , econometrics , portfolio , volatility (finance) , percentage point , stock exchange , inflation (cosmology) , stock market index , financial economics , monetary economics , stock market , finance , geography , context (archaeology) , physics , archaeology , theoretical physics
We examine the impact of expected inflation on stock returns. We useinflation forecasts from the Focus survey and real returns of Ibovespa (theindex of B3, the Brazilian stock exchange). In our main specification, anincrease of 1 percentage point in expected inflation for the next 12 monthsis associated with a decline of 0.57 percentage points in stock returns.Stock returns react negatively to the 5-year CDS volatility and the VIXindex. A simulated portfolio with a strategy based on changes in inflationexpectations from 2003 to 2016 has cumulated real returns of 135 percentwhile cumulated real Ibovespa returns are 48 percent. The strategy implieshigher cumulated real returns compared with Ibovespa in 69 percent of theperiod.