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Stock Returns as Predictors of Interest Rates and Inflation

Published online by Cambridge University Press:  06 April 2009

Sheridan Titman  and
Arthur Warga
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Abstract

This study examines whether stock returns provide forecasts of changes in interest rates and inflation. In contrast to earlier work that indicated that changes in expected inflation negatively affect stock returns, we find a statistically significant positive relation between stock returns and future inflation rate changes as well as a significant positive relation between stock returns and future interest rate changes. Real estate investment trusts, which are particularly interest- and inflation-sensitive securities, provide better forecasts than a broad market index. Finally, we find that most of the evidence supporting the forecasting ability of stock returns occurs in the October 1979 to October 1982 period when the Federal Reserve Board chose not to counteract interest rate changes.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 24 , Issue 1 , March 1989 , pp. 47 - 58
Copyright
Copyright © School of Business Administration, University of Washington 1989

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