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Inflation and World Equity Selection

Financial Analysts Journal (1995): 28-42.

Claude B. Erb
First Chicago Investment Management Company, Chicago, IL 60670, USA

Campbell R. Harvey
Duke University, Durham, NC 27708, USA
National Bureau of Economic Research, Cambridge, MA 02138, USA

Tadas E. Viskanta
First Chicago Investment Management Company, Chicago, IL 60670, USA

We investigate the ability of country inflation to explain the cross-section of expected returns in 41 developed and emerging equity markets. Consistent with previous research examining the time-series of inflation and stock returns in the U.S., we document a significant negative relation for most countries. However, our cross-sectional analysis indicates that inflation, as a country attribute, commands a positive premium. We find that inflation also explains the cross-sectional variation in volatility in these countries. In addition, we find that country credit risk contains important information about expected inflation.