Stock Market Reaction to Good and Bad Inflation News

Abstract

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. (c) 2008 The Southern Finance Association and the Southwestern Finance Association.

Testing The ‘Black Swan Effect’ on Croatian Stock Market Between 2000 and 2013

“…The depreciation of exchange rates has adverse effects on exporters and importers alike. Exporters have an advantage over those in other countries as their sales increase and their stock prices go up (see: Berben and Jansen 2005, Yau and Nieh, 2006andHorobet and Ilie 2007, Adjasi et al 2008, Knif et al 2008. While Croatia imports goods and services rather than export them, the depreciation of exchange rates has a negative impact on the stock exchange rate.…”

“…In particular, exchange rate depreciations might lead to an increase of nonperforming loans in countries with a high degree of lending in foreign currencies to unhedged borrowers (approximated by international claims which are mainly denominated in foreign currencies). A drop in stock prices also negatively affects bank asset quality, in particular in countries with large stock markets relative to the economy (Beck, 2013 Muradoglu et al 2001, Maysami et al 2004, Knif et al 2008, Adam and Tweneboah 2009. Croatia faced the highest inflation rate in 2009 but the national currency, the kuna, is stable.…”

Testing for asymmetries in price reactions to quarterly earnings announcements on Tallinn, Riga and Vilnius Stock Exchanges during 2000–2009

“…They also find support for announcement returns for extreme good news firms being significantly higher during periods of low sentiment than during periods of high sentiment (not supported in the context of bad news). In the context of macroeconomic news, Knif et al (2008) support H3 and H4 while Laakkonen and Lanne (2008) support H3 and reject H4.…”

Do Financial Markets Learn from ECB Monetary Policy?

“…Knif et al (2008) find that negative CPI and PPI shocks are associated with higher stock returns. Moreover, since its inception, the ECB has included inflation targeting in its monetary policy strategy.…”