Causal Relations Among Stock Returns, Interest Rates, Real Activity, and Inflation



    Search for more papers by this author
    • Department of Finance, Carlson School of Management, University of Minnesota. I would like to thank an anonymous referee and editor for their many helpful comments and advice.


Using a multivariate vector-autoregression (VAR) approach, this paper investigates causal relations and dynamic interactions among asset returns, real activity, and inflation in the postwar United States. Major findings are (1) stock returns appear Granger-causally prior and help explain real activity, (2) with interest rates in the VAR, stock returns explain little variation in inflation, although interest rates explain a substantial fraction of the variation in inflation, and (3) inflation explains little variation in real activity. These findings seem more compatible with Fama (1981) than with Geske and Roll (1983) or with Ram and Spencer (1983).