Article ID Journal Published Year Pages File Type
986998 Review of Financial Economics 2006 19 Pages PDF
Abstract

The paper studies the dynamic relationship between real stock returns and expected and unexpected inflation utilizing a Markov Switching vector autoregressive model (MS-VAR). The MS-VAR model has the advantage that it is able to capture the dependence structure of the series both in terms of mean and variance. Univariate and multivariate innovation decompositions are employed to separate inflation into two components, the expected and unexpected. The empirical evidence suggests that real stock returns are not related to expected and unexpected inflation and this result is independent of the method used to separate inflation into the two components. Rather, the results suggest that stock market movements are regime dependent, implying that stock market performance is not predictable.

Related Topics
Social Sciences and Humanities Economics, Econometrics and Finance Economics and Econometrics
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