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INFLATION AND RATES OF RETURN ON COMMON STOCKS

INFLATION AND RATES OF RETURN ON COMMON STOCKS MAY 1916 INFLAnON AND RATES OF RETURN ON COMMON STOCKS CHARLES R. NELSON· 1. INTRODUCTION THERE WOULD SEEM to be little doubt that if one had surveyed academic and nonacademic students of the stock market in the year 1968 that one would have found wide agreement with the proposition that rates of return on common stocks move directly with the rate of inflation. This proposition simply extends Irving Fisher's well-known hypothesis [5] to rates of return on common stocks. That hypothesis states that expected rates of return consist of a "real" return plus the expected rate of inflation and the real return does not move systematically with the rate of inflation; in short, investors will on average be fully compensated for erosion in purchasing power. Belief in the extension of Fisher's Hypothesis to returns on stocks has suffered considerable erosion in recent years as a result of what appears to be dramatically contradictory evidence. The purpose of this paper is to investigate empirically the relation between returns on common stocks and the rate of inflation over the post-war period. The evidence presented does not support the Fisher hypothesis but rather suggests that a negative relation between returns and http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

INFLATION AND RATES OF RETURN ON COMMON STOCKS

The Journal of Finance , Volume 31 (2) – May 1, 1976

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References (13)

Publisher
Wiley
Copyright
1976 The American Finance Association
ISSN
0022-1082
eISSN
1540-6261
DOI
10.1111/j.1540-6261.1976.tb01900.x
Publisher site
See Article on Publisher Site

Abstract

MAY 1916 INFLAnON AND RATES OF RETURN ON COMMON STOCKS CHARLES R. NELSON· 1. INTRODUCTION THERE WOULD SEEM to be little doubt that if one had surveyed academic and nonacademic students of the stock market in the year 1968 that one would have found wide agreement with the proposition that rates of return on common stocks move directly with the rate of inflation. This proposition simply extends Irving Fisher's well-known hypothesis [5] to rates of return on common stocks. That hypothesis states that expected rates of return consist of a "real" return plus the expected rate of inflation and the real return does not move systematically with the rate of inflation; in short, investors will on average be fully compensated for erosion in purchasing power. Belief in the extension of Fisher's Hypothesis to returns on stocks has suffered considerable erosion in recent years as a result of what appears to be dramatically contradictory evidence. The purpose of this paper is to investigate empirically the relation between returns on common stocks and the rate of inflation over the post-war period. The evidence presented does not support the Fisher hypothesis but rather suggests that a negative relation between returns and

Journal

The Journal of FinanceWiley

Published: May 1, 1976

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