Stock Returns and Inflation in Greece

Abstract

This paper examines the relationship between stock returns and inflation. We focus on various econometric techniques to test this relationship, using monthly values of the Athens Stock Exchange Price index and the Greek Consumer Price index over the period 1988-2002. The results from a simple OLS model show evidence of a positive but not significant relationship, while when we consider a system of equations including lagged values of inflation we find a negative but not significant effect of lagged inflation to stock returns. Using the Johansen cointegration test, we find that there is no long-run relationship between stock returns and inflation in Greece. The results indicate that the inflation rate is not correlated with stock returns. Finally, from a dynamic point of view, the Granger-Causality tests indicate evidence of no causality among these variables.

Keywords: Stock Returns, Inflation, Athen Stock Exchange, Greece, Cointegration

JEL Classification: G10, G15, E44