The purpose of this study is to investigate the relationship between stock returns and inflation for Thailand. The variables used in this study include Bangkok SET 100 stock index, S&P 500 index, consumer price index, money supply, exchange rate between USD and THB, money market rate, and crude oil price. The data are collected at the monthly interval from the Taiwan Economic Journal (TEJ), spanning from January 1997 to December 2011. All variables are found to be I(1) series using ADF, PP, and KPSS tests. Hence, the series become stationary after first differencing. The multiple regression model and the GARCH(1,1) model are employed in the empirical study. Empirical results show that inflation had negative effects on nominal and real stock returns and, moreover, the inflation-returns relationship was nonlinear in the sense that positive inflation and negative inflation exerted asymmetric effects. Evidence from the Thai stock market is in favor of the Fama’s proxy hypothesis. It is also found from the variance equation of the GARCH model that nominal and real stock returns would be less volatile in the period of high inflation or high deflation.
