The complex relationship between inflation and equity returns

What is it about?

This paper uses a bivariate VARMA, GARCH-in-Mean, asymmetric BEKK model to investigate the relationship between inflation, inflation uncertainty, and equity returns. Using monthly inflation and equity returns data for the G7 and EM7 economies, we find that the effects of inflation and inflation uncertainty on equity returns vary across countries. The mixed evidence we find potentially reflects the changing dynamics, policy regimes, economic shocks, and country-specific factors (such as differences in the financing patterns of enterprises and the legal and financial environments) across the G7 and EM7 countries.

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