TESTS OF INFLATION AND INDUSTRY PORTFOLIO STOCK RETURNS

This study examines the relationship between stock returns and inflation across 19 industry sectors during the pre- and post-World War II periods. The results in the postwar period suggest that the proxy hypothesis can explain the spurious negative relationship between stock returns and expected inflation in all industries, but not the negative relationship between stock returns and unexpected inflation in non-natural-resource industries. We find little evidence supporting the nominal contracting hypothesis. Also, the expected inflation/returns sensitivity appears to be positively related to the level of real assets, but negatively related to debt ratio during the postwar period.