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Stock interest rate risk and inflation shocks

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  • Jareño, Francisco
  • Navarro, Eliseo

Abstract

In this paper we proceed to estimate a measure of the flow-through capability of the firms listed on the Spanish Stock Exchange. The flow-through capability is defined as the ability of firms to transmit inflation shocks to the prices of the products and services sold by the company. According to a strand of the literature, this flow-through capability can to some extent explain the so called "stock duration paradox", which is the difference between the theoretical stock duration derived from the DDM model and its empirical estimates. The line of reasoning suggests that if a company can pass on inflation shocks to the prices of its own outputs and then to profits and dividends, nominal interest rate changes due to variations in the expected inflation will have a limited impact on stock prices. So in this paper we first estimate the flow-through capability for different industries and find great differences among them. Then we analyse the link between flow-through capability and stock duration and find a significant negative relationship between them, as claimed by part of the literature.

Suggested Citation

  • Jareño, Francisco & Navarro, Eliseo, 2010. "Stock interest rate risk and inflation shocks," European Journal of Operational Research, Elsevier, vol. 201(2), pages 337-348, March.
    • Handle: RePEc:eee:ejores:v:201:y:2010:i:2:p:337-348
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    Cited by:

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    2. Natalia Campos & Francisco Jareño & Marta Tolentino, 2016. "Interest Rate Risk Analysis with Multifactor Model: The US case," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 14-22, March.
    3. M. Caridad SEVILLANO & Francisco JAREÑO, 2017. "The Impact of Relevant International Factors on the Returns of IBEX 35 Companies, 2000-2016," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 17(1), pages 37-56.
    4. Peiró, Amado, 2016. "Stock prices and macroeconomic factors: Some European evidence," International Review of Economics & Finance, Elsevier, vol. 41(C), pages 287-294.
    5. María de la O & Francisco JAREÑO, Francisco & SKINNER, Frank S., 2017. "The Financial Crisis Impact: An Industry Level Analysis Of The Us Stock Market González," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 17(2), pages 61-74.
    6. González, María de la O & Jareño, Francisco, 2019. "Testing extensions of Fama & French models: A quantile regression approach," The Quarterly Review of Economics and Finance, Elsevier, vol. 71(C), pages 188-204.
    7. Antonio Díaz & Francisco Jareño, 2013. "Inflation news and stock returns: market direction and flow-through ability," Empirical Economics, Springer, vol. 44(2), pages 775-798, April.

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