| In this research, firstly we proceed to estimate a measure of the flow-through capability of the firms listed in the Spanish Stock Exchange, which is defined as the ability of firms to transmit inflation shocks to the prices of the products and services sold by the company. According to a strand of literature, this flow-through capability can explain, to some extent, the so called "stock duration paradox", that is the difference between the theoretical stock duration derived from the DDM model and its empirical estimates. The line of reasoning suggests that if a company can pass on inflation shocks to the prices of its own outputs and then to profits and dividends, nominal interest rate changes due to variations in the expected inflation will have a limited impact on stock prices. We analyse the link between flow-through capability and stock duration finding a significant negative relationship between them as claimed by part of the literature.;On the other hand, we realise that previous studies of the short run response of daily stock prices to announcements of macroeconomic news could be biased when responses in different scenarios cancel each other out. In our analysis of inflation news in the Spanish stock market, we consider behavioural arguments and implement the study by sector of activity to controlling for the "flow-though" ability of the firms of each industry. In general, our results are quite consistent with the "behavioural finance" hypothesis and the "flow-through" hypothesis. Unanticipated inflation news implies abnormal returns depending on the direction of the news, the state of the economy and the flow-through ability of the sector.;Finally, in this framework, we incorporate two novel explanatory variables: on the one hand, core inflation and "no core" component of inflation rate, and, on the other hand, the spread between Spanish inflation rate and European inflation rate, both harmonized. In the short-term analysis, we conclude that the "no core" component of inflation rate, more changeable, has negative effects on some sectoral returns. In the long-term analysis, the lagged core inflation (structural component) affects negatively sectoral returns.;Keywords. Inflation announcement; Stock return; Core inflation; Harmonized Consumer Price Index (HCPI); Flow-through ability; Behavioural finance; Flow-through capability; stock duration; sectoral analysis. |
