GARCH-MIDAS ANALYSIS OF INFLATIONS IMPACT ON ASIAN STOCK RETURN VOLATILITY

Persistent inflationary pressures in Asia have prompted central banks to raise interest rates, triggering a shift from equities to alternative assets and amplifying stock return volatility. This study examines the impact of inflation on stock return volatility in five Asian countries using a GARCH-MIDAS approach with mixed-frequency data (daily stock returns and monthly inflation). Results reveal that higher inflation significantly increases volatility and depresses returns, underscoring inflation’s critical role in shaping market dynamics. By leveraging the natural frequencies of the variables, our analysis provides deeper insights into volatility drivers. We recommend that monetary authorities enhance communication of inflation expectations to investors to mitigate adverse volatility effects, fostering stable equity markets.