Inflation and output as predictors of stock returns and volatility: international evidence

Using monthly post-WWII data from 13 developed and developing countries and a battery of GARCH models, the influential study of Schwert's (Journal of Finance, 54 (5), 1115-1153, 1989) on US stock market volatility is extended to an international setting. In line with the evidence reported in Schwert (1989), it is found that macroeconomic volatility, measured by movements in inflation and real output, have a weak predictive power for stock market volatility and returns. The findings suggest that there is no strong support for the Fisher effect in international stock returns. Moreover, with the exception of a few countries, a procyclical monetary policy response seems evident in data during the sample period.