Sensitivity of Equity Returns to Inflation and Inflation Uncertainty: A Cross-country Evidence

Abstract

This paper investigates the effect of inflation and inflation uncertainty on equity returns for the data of 41 countries. A GARCH based measure of volatility is used to model inflation uncertainty. The empirical results shows that the effects are not statistically significant in most of the cases, which implies equity investors are not sensitive to inflation and inflation uncertainty. Consistent to existing findings, equity is not a hedge against inflation (and inflation uncertainty) in developed countries; further, emerging and frontier countries are not exception. Inflation uncertainty exerts a negative influence in equity returns. The results are robust to alternative measurements. These results have important implications for asset manager’s diversification purpose and monetary policymaking.