Stock Prices and Inflation: New Evidence from the Pacific-Basin Countries

Stock Prices and Inflation: New Evidence from the Pacific-Basin Countries This paper investigates the statistical relationship between stock prices and inflation in nine countries in the Pacific-Basin. On balance, regression analysis on the nine markets shows negative relationships between stock returns in real terms and inflation in the short run, while co-integration tests on the same markets display a positive relationship between the same variables over the long run. The time path of the response of stock prices plotted against corresponding changes in consumer price indices validates this dichotomy in time-related response patterns of stock prices to inflation; namely, a blip of negative responses at the beginning changes to a positive response over a longer period of time. Stock prices in Asia, like those in the U.S. and Europe, appear to reflect a time-varying memory associated with inflation shocks that make stock portfolios a reasonably good hedge against inflation in the long run. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Stock Prices and Inflation: New Evidence from the Pacific-Basin Countries

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Publisher
Kluwer Academic Publishers
Copyright
Copyright © 2004 by Kluwer Academic Publishers
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1023/B:REQU.0000015853.16564.e3
Publisher site
See Article on Publisher Site

Abstract

This paper investigates the statistical relationship between stock prices and inflation in nine countries in the Pacific-Basin. On balance, regression analysis on the nine markets shows negative relationships between stock returns in real terms and inflation in the short run, while co-integration tests on the same markets display a positive relationship between the same variables over the long run. The time path of the response of stock prices plotted against corresponding changes in consumer price indices validates this dichotomy in time-related response patterns of stock prices to inflation; namely, a blip of negative responses at the beginning changes to a positive response over a longer period of time. Stock prices in Asia, like those in the U.S. and Europe, appear to reflect a time-varying memory associated with inflation shocks that make stock portfolios a reasonably good hedge against inflation in the long run.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Oct 2, 2004

References

  • Stock Prices and Inflation
    Anari, A.; Kolari, J.
  • Common Stocks as a Hedge Against Inflation
    Bodie, Z.
  • The Relationship Between Stock Market Returns and Rates of Inflation
    Firth, M.
  • The Fiscal and Monetary Linkage Between Stock Returns and Inflation
    Geske, R.; Roll, R.

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