Inflation and Stock Returns at B3

22 Pages Posted: 25 May 2018 Last revised: 14 Oct 2018

See all articles by Carlos S. Chaves

Carlos S. Chaves

Fundação Petrobras de Seguridade Social - PETROS; Getulio Vargas Foundation (FGV) - FGV/EPGE Escola Brasileira de Economia e Finanças

Andre C. Silva

Nova School of Business and Economics

Date Written: October 1, 2018

Abstract

We examine the impact of expected inflation on stock returns. We use inflation forecasts from the Focus survey and real returns of Ibovespa (the index of B3, the Brazilian stock exchange). In our main specification, an increase of $ 1 $ percentage point in expected inflation for the next 12 months is associated with a decline of $ 0.57 $ percentage points in stock returns. Stock returns react negatively to the 5-year CDS volatility and the VIX index. A simulated portfolio with a strategy based on changes in inflation expectations from 2003 to 2016 has cumulated real returns of $ 135 $ percent while cumulated real Ibovespa returns are $ 48 $ percent. The strategy implies higher cumulated real returns compared with Ibovespa in $ 69 $ percent of the period.

Keywords: stock returns, inflation, B3, inflation forecasts, Focus survey, Ibovespa

JEL Classification: E31, G11, G12, G17

Suggested Citation

S. Chaves, Carlos Roberto and Silva, Andre C., Inflation and Stock Returns at B3 (October 1, 2018). Available at SSRN: https://ssrn.com/abstract=3178972 or http://dx.doi.org/10.2139/ssrn.3178972

Carlos Roberto S. Chaves

Fundação Petrobras de Seguridade Social - PETROS ( email )

Rua do Ouvidor 98
Rio de Janeiro, 20040-030
Brazil

Getulio Vargas Foundation (FGV) - FGV/EPGE Escola Brasileira de Economia e Finanças ( email )

Praia de Botafogo 190/1125, CEP
Rio de Janeiro RJ 22253-900
Brazil

Andre C. Silva (Contact Author)

Nova School of Business and Economics ( email )

Campus de Carcavelos
Carcavelos, 2775-405
Portugal

HOME PAGE: http://sites.google.com/view/andredecastrosilva

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