Peer Reviewed Open Access

This paper is reviewed in accordance with the Peer Review Program of IRA Academico Research

An Analytical Study of the Effect of Inflation on Stock Market Returns

S. Sathyanarayana, Sudhindra Gargesa
Inflation means a persistent change in the price level of goods and services in an economy. It is generally measured in the consumer price index (CPI) or retail price index (RPI). Inflation reduces the purchasing power of a country's currency, as we need more units of currency over time to buy the same goods and services. The current empirical paper entitled “relationship between inflation and stock market evidence from selected global stock markets” have been undertaken with an intention to investigate the relationship between inflation and stock returns of the chosen economies. In order to realize the stated objectives, the researchers have collected the monthly data 2000 to 2017 for selected indices. In the first phase, log returns were computed and it has been tested for the existence of unit root in the distribution. In the second phase, we ran Pearson correlation coefficient for the collected data to find out the association between the inflation and stock returns. Majority of the chosen indices recorded a negative coefficient with the dependent variable. For India, Austria, Belgium, Canada, Chile, China, France, Ireland we found a negative coefficient. However, Brazil Indonesia, Japanese, Mexico, Spanish and Turkey reported a positive coefficient.  Current study clearly throws light on the effect of inflation on the stock market returns, therefore; it can help the market participants such as traders, fund managers, and investors to make good portfolio decisions based on the information about expected inflation and unexpected inflation. The study confirms that there exists a significant relationship between the stock returns and inflation for Australian, Belgium, Canadian, Chilean, Chinese, French and Irish stock benchmark indices. Firms can take this one has a clue to adjust their reported profits by raising the prices.  The policymakers can employ contractionary policy to reduce the supply of money by offering a low interest rate on t bills, increasing the interest rates (bank rate policy) and increasing the cash reserve ratios which in turn reduces the lending capacity of the banks.
Inflation, CPI, WPI, Real returns, Serial Correlation, ADF stats.
Full Text:
PDF Full Text

©IRA Academico Research & its authors
This article is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License. This article can be used for non-commercial purposes. Mentioning of the publication source is mandatory while referring this article in any future works.