Inflation Surprises and Equity Returns

48 Pages Posted: 22 Nov 2022 Last revised: 5 Dec 2023

See all articles by Antonio Gil de Rubio Cruz

Antonio Gil de Rubio Cruz

Board of Governors of the Federal Reserve System

Emilio Osambela

Board of Governors of the Federal Reserve System

Berardino Palazzo

Board of Governors of the Federal Reserve System

Francisco Palomino

Board of Governors of the Federal Reserve System

Gustavo Suarez

Board of Governors of the Federal Reserve System

Date Written: November 21, 2023

Abstract

U.S. stocks' response to inflation surprises is, on average, robustly negative and shows pronounced time-series variability. Consistent with a view that stock prices respond to inflation surprises that affect the monetary policy stance, we document the largest stock market sensitivity during periods when inflation expectations and the output gap are running high. During these periods, firms with low net leverage, large market capitalization, high market beta, low book-to-market, and low markups are especially susceptible to inflation surprises.

Keywords: Inflation surprises, equity returns, firm characteristics

JEL Classification: E31, G12, G14

Suggested Citation

Gil de Rubio Cruz, Antonio and Osambela, Emilio and Palazzo, Berardino and Palomino, Francisco and Suarez, Gustavo, Inflation Surprises and Equity Returns (November 21, 2023). Available at SSRN: https://ssrn.com/abstract=4280699 or http://dx.doi.org/10.2139/ssrn.4280699

Antonio Gil de Rubio Cruz

Board of Governors of the Federal Reserve System

Emilio Osambela

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Berardino Palazzo (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Francisco Palomino

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Gustavo Suarez

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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