Both authors from School of Business Administration, The University of Michigan. We appreciate the helpful comments and suggestions by Robert Barsky, Sudipto Bhattacharya, Michael Bradley, Jennifer Conrad, Tom George, Pierre Hillion, Naveen Khanna, E. Han Kim, Robert King, John McConnell, Gregory Niehaus, Charles Plosser, Paul Richardson, Jay Ritter, Allen Spivey, and the finance workshop participants at The University of Michigan. Comments and suggestions by René Stulz and an anonymous referee were particularly helpful in sharpening the focus of the paper. We would also like to thank Patti Lamparter for preparing the manuscript. Earlier versions of this paper were presented at the Western Finance Association (Napa) and the European Finance Association (Istanbul) Meetings in June and September, 1988, respectively. Partial financial support for this paper was provided by the School of Business Administration, The University of Michigan.
Relative Price Variability, Real Shocks, and the Stock Market
Article first published online: 30 APR 2012
1990 The American Finance Association
The Journal of Finance
Volume 45, Issue 2, pages 479–496, June 1990
How to Cite
KAUL, G. and SEYHUN, H. N. (1990), Relative Price Variability, Real Shocks, and the Stock Market. The Journal of Finance, 45: 479–496. doi: 10.1111/j.1540-6261.1990.tb03699.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
In this paper, we investigate the effects of relative price variability on output and the stock market and gauge the extent to which inflation proxies for relative price variability in stock return-inflation regressions. The evidence shows that the negative stock return-inflation relations proxy for the adverse effects of relative price variability on economic activity, particularly during the seventies, when the U.S. experienced oil supply shocks. Hence, it appears that inflation spuriously affects the stock market in two ways: the aggregate output link of Fama (1981) and the supply shocks reflected in relative price variability.