Inflation News and the Stock Market: Macroefficiency or Overreaction

48 Pages Posted: 23 Jun 2003

See all articles by Johan Knif

Johan Knif

Hanken School of Economics

James W. Kolari

Texas A&M University - Department of Finance

Seppo Pynnonen

University of Vaasa, Department of Mathematics and Statistics

Date Written: January 15, 2003

Abstract

Previous studies find only a weak relationship between inflation news and stock market returns. We show that significant daily market reactions to different types of inflation shocks occur in dynamic economic states. Also, although previous work has not examined longer-run market reactions, our results demonstrate large, significant, and slow market responses to both positive and negative inflation shocks in the post-event month. Stock return reversals are common in months subsequent to large market response to inflation shocks. In both daily and monthly analyses we find instances in which stock returns are not inversely related to inflation shocks. These and other findings lead us to conclude that inflation shocks are important news events that can produce a variety of stock market reactions depending on economic state and type of inflation shock. Our evidence also suggests that inflation shocks can generate stock market overreactions in some cases.

Suggested Citation

Knif, Johan Anders and Kolari, James W. and Pynnonen, Seppo, Inflation News and the Stock Market: Macroefficiency or Overreaction (January 15, 2003). Available at SSRN: https://ssrn.com/abstract=407844 or http://dx.doi.org/10.2139/ssrn.407844

Johan Anders Knif

Hanken School of Economics ( email )

P.O. Box 287
FIN-65101 Vasa
Finland
+358 453556008 (Phone)

James W. Kolari

Texas A&M University - Department of Finance ( email )

MS-4218
Department of Finance
College Station, TX TX 77843-4218
United States
979-845-4803 (Phone)
979-845-3884 (Fax)

Seppo Pynnonen (Contact Author)

University of Vaasa, Department of Mathematics and Statistics ( email )

Wolffintie 34
65200 Vaasa
Finland
+358-21-449 8311 (Phone)

HOME PAGE: http://www.uva.fi/~sjp/

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