Dear Osama,

It seems you would want to capture the effect of stagflation on the stock market through the deviation of prices from their effecient level. The stock-market prices are efficient, which can be captured throught regression analysis. The inflation would cause deviation from those prices. You can build a system of equation model to do this.

The Stock Market's performance, as well as individual stocks (e.g., stock prices, volume, and the like) is likely correlated with many variables. Macroeconomic variables (e.g., real GDP growth, inflation, unemployment rate, and the like) are included in that set of variables along with tax and regulation policies, mergers, acquisitions, trade, technology, geopolitical tension, supply shocks, and so many others.

Stagflation (i.e., a relatively stagnate economy along with significant inflation) typically involves a confluence of other variables. As Lall Ramrattan implied, it is wise to be careful on how you define and measure variables; moreover, the selection of which ones are included is important because multicollinearity is likely in regression analysis when several of these are included in the model.

I hope this helps,

Rob

Dr Wadgi,

I'd suggest you to take a look at the Austrian Theory of Business Cycles, in particular a new book by prof. Mark Thornton, The Skyscraper's Curse. It is not directly related to a particular case of a Stagflation economy, but it helps explaining how do economies get there. Additionally you'd probably get some insights on how and why the stockmarket reacts the way it does to the macroeconomic variables.

Dear Osama

Stagflation (high inflation and high unemployment (related to recession) related to stock market returns (associated with bear market) occurred in the US primarily in the late 1970s and early 1980s. Empirical studies of these variables would be focussed n this time period. Some relevant research is:

https://www.jstor.org/stable/1806180?seq=1#page_scan_tab_contents

Article Dynamic cyclical comovements of oil prices with industrial p...

Dear Colleagues and Friends from RG,

Stagflation is a very unfavorable type of deep economic crisis characterized by high inflation, sometimes hyperinflation and high unemployment. For the stock exchange market, this is a particularly unfavorable type of economic crisis. The global economic crises that are now starting due to the development of the Coronavirus causing Covid-19 disease may in many countries turn into a financial crisis, a debt crisis of the public finance system with the recession of the national economy. If the anti-crisis, interventionist measures currently implemented or announced for rapid implementation, assistance programs for enterprises, public institutions, and citizens as part of using the available instruments of fiscal and monetary policy did not work, then the risk of deepening the economic crisis would not work. Then this deepened economic crisis could be more serious than that which occurred in 2008 and could be characterized by stagflation. In such a situation, interventionist actions of central banks, e.g. by continuing to lower interest rates, could no longer work effectively because there is excess money on the markets and on the stock exchange markets there would be another wave of strong declines in stock valuations, i.e. subsequent phases of the stock market crash.

Have a nice day. Regards.

Dariusz Prokopowicz

More than six months have passed since March 2020. During this period, the economic crisis appeared in many countries in connection with the development of the SARS-CoV-2 (Covid-19) coronavirus pandemic. In a situation of applying a mild monetary policy, introducing additional amounts of money into the economy, etc., in a situation of low economic growth and rising unemployment, the risk of stagflation in the future grows if the Coronavirus pandemic returns in successive waves in the following years and the economy does not return to good economic conditions. Best wishes,

Dariusz Prokopowicz