The Effects of Inflation News on High Frequency Stock Returns

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Abstract
Previous research using daily returns finds conflicting evidence about the relationship between unanticipated inflation (news) and stock returns. We explore the relationship by looking at the response (in minutes and trades) of size-based stock portfolios to the news (controlling for expectations) imbedded in the regularly scheduled Producer Price (PPI) and Consumer Price (CPI) Index announcements. In particular, we answer the following four questions: 1) Do stocks respond to inflation news? 2) Why is the response to PPI news more significant than the response to CPI news? 3) Why do large stocks, but not small stocks, respond significantly to PPI news? and 4) What is the speed and path of that response? In the process of answering these four questions, we also note that varying response speeds to inflation news cannot explain the cross-autocorrelation puzzle.