Knif, Johan, James Kolari, and Seppo Pynnonen (2008). Stock market reaction to good and bad inflation news. Journal of Financial Research (Forthcoming)

Abstract. This paper shows that differentiating between good and bad inflation news is important to understanding how inflation impacts stock market returns. Summing positive and negative inflation shocks as in previous studies tends to wash out or mute the effects of inflation news on stock returns. More specifically, we find that, depending on the economic state, positive and negative inflation shocks can produce a variety of stock market reactions. We conclude that inflation's effect on stock returns is conditional on whether investors perceive inflation shocks as good or bad news in different economic states.

JEL Classification: E31, G00, G14

Key words: Inflation; Stock Market; Event Study