| Summary: | A considerable literature exists that examines the relationship between stock market returns and a range of macroeconomic and financial variables over a number of different stock markets and time horizons. Chen, Roll and Ross (1986) have argued that stock returns should be affected by any factor that influences future cash flows or the discount rate of those cash flows.
Previous researchers have documented significant effects of inflation and interest rates on equity returns; few examples are Geske and Rol (1983), Fama (1981), Fama and Gibbons (1982). In my research I have also considered these two variables to determine the relation between inflation, interest rates and stock returns. Moreover, I have particularly focused on the direction of the relationship between stock return and inflation.
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