Mindset of Finance

This paper examines the relationship between stock returns

and inflation. We focus on various econometric techniques to

test this relationship, using monthly values of the Athens Stock

Exchange Price index and the Greek Consumer Price index over

the period 1988-2002. The results from a simple OLS model

show evidence of a positive but not significant relationship,

while when we consider a system of equations including lagged

values of inflation we find a negative but not significant effect of

lagged inflation to stock returns. 

Using the Johansen cointegration test, we find that there is no long-run relationship

between stock returns and inflation in Greece. The results

indicate that the inflation rate is not correlated with stock returns.

Finally, from a dynamic point of view, the Granger-Causality

tests indicate evidence of no causality among these variables.