Output Growth, Inflation and Interest Rate on Stock Return and Volatility: The Predictive Power

Using monthly data from seven mature and emerging markets and GARCH and EGARCH models, the study of Davis and Kutan (Applied Financial Economics, 13, 693-700, 2003) on inflation and output on stock returns and volatility is extended by including interest rate to compare the effect between three mature markets (US, Japan and Singapore) and four crisis experienced emerging markets (Malaysia, India, Korea and Philippines). Results reveal that economic volatility, as measured by movement in inflation, output growth, and interest rate, has weak predictor power on stock market volatility and returns. In line with the evidence reported in Davis and Kutan (2003), the findings suggest that the Fisher effect in stock returns among the seven mature and emerging markets is not supported.