Stock Returns and Inflation Shocks in Weaker Economic Times

Financial Management, Forthcoming.

Posted: 15 Jun 2019 Last revised: 28 Dec 2021

See all articles by Chris T. Stivers

Chris T. Stivers

University of Louisville

Licheng Sun

Old Dominion University

Robert A. Connolly

University of Florida

Date Written: November 20, 2021


We show that the concurrent relation between quarterly stock returns and inflation shocks is economically and robustly significant only over weaker economic times, strongly negative prior to the late 1990s and strongly positive afterwards. Conversely, in the stronger economic times over our 1981 to 2017 sample, this stock-inflation relation is relatively much smaller and usually marginally negative. Our evidence suggests a role for two complementary channels. First, we find consistent state-dependent patterns in how inflation shocks are related to expected economic growth and/or the equity risk premium, indicating that inflation non-neutrality is stronger over weaker economic times. Second, our findings imply that the inflation signal about the underlying economic state intensifies during weaker economic times, due to the elevated economic-state uncertainty then. We also contribute by contrasting subjective (survey-based) vs. objective inflation shocks and by evaluating the relation between inflation shocks and forward equity yields.

Keywords: Stock Returns, Inflation Shocks, Inflation Expectations, Uncertain Economic States, Economic Growth, the Equity Premium, Forward Equity Yields

JEL Classification: G12

Suggested Citation

Stivers, Chris T. and Sun, Licheng and Connolly, Robert A., Stock Returns and Inflation Shocks in Weaker Economic Times (November 20, 2021). Financial Management, Forthcoming., Available at SSRN: or

Chris T. Stivers (Contact Author)

University of Louisville ( email )

Finance Dept., College of Business
University of Louisville
Louisville, KY 40292
United States
502-852-4829 (Phone)

Licheng Sun

Old Dominion University ( email )

Strome College of Business
Department of Finance
Norfolk, VA 23529-0222
United States

Robert A. Connolly

University of Florida ( email )

P.O. Box 117168
Gainesville, FL 32611
United States

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