Stock Returns and Inflation Revisited

35 Pages Posted: 19 Jan 2009

Date Written: January 12, 2009


The stock return-inflation relation has been an important issue in financial economics. Several hypotheses have been proposed to explain the relation. Among these, the Modigliani and Cohn's inflation illusion hypothesis has received renewed attention recently. Another hypothesis is the two-regime hypothesis. We reexamine these hypotheses using long sample data. We find that the Modigliani and Cohn hypothesis can explain the post-war negative relation between stock returns and inflation, but it is not easily compatible with the pre-war positive relation. We confirm the presence of two regimes in the relation between the pre- and post-war periods using an alternative structural VAR identification method.

Keywords: Stock Returns, Inflation, Inflation Illusion, Structural VAR

JEL Classification: G12, E44, C32

Suggested Citation

Lee, Bong-Soo, Stock Returns and Inflation Revisited (January 12, 2009). Available at SSRN: or

Bong-Soo Lee (Contact Author)

Florida State University ( email )

423 Rovetta Business Building
Tallahassee, FL 32306-1110
United States
850-644-4713 (Phone)


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