IDEAS home Printed from https://ideas.repec.org/a/ags/thkase/338439.html
   My bibliography  Save this article

Can the Fisher Effect Theory Work in Pakistan?

Author

Listed:
  • Khan, Khalid
  • SU, Chi-Wei
  • Khurshid, Adnan
  • Rehman, Ashfaq U.

Abstract

This paper examines the relationship between the stock market and inflation rate in Pakistan, using the bootstrap Granger full-sample causality test and sub-sample rolling window estimation to test whether the results support the Fisher hypothesis in Pakistan. The empirical result of full sample size shows the unidirectional causality between the stock market and inflation rate. It further shows that in the presence of structural changes, full sample relationship is unstable and unreliable. We use the rolling window estimation considering the time-varying characteristics and conclude bidirectional causality between the inflation rate and stock market in the different sub-sample. The findings are inconsistent with Fisher hypothesis. The conclusion that Inflation rate and the stock market have no positive long-term relationship; the stock market does not offer a hedge against an inflation rate so the policy maker should take measures to balance the tradeoff between the stock market and inflation rate in the short run.

Suggested Citation

  • Khan, Khalid & SU, Chi-Wei & Khurshid, Adnan & Rehman, Ashfaq U., 2018. "Can the Fisher Effect Theory Work in Pakistan?," Asian Journal of Applied Economics, Kasetsart University, Center for Applied Economics Research, vol. 25(1), October.
    • Handle: RePEc:ags:thkase:338439
    DOI: 10.22004/ag.econ.338439
    as

    Download full text from publisher

    File URL: https://ageconsearch.umn.edu/record/338439/files/17.Vol25Issue1_p50-64.pdf
    Download Restriction: no
    File URL: https://libkey.io/10.22004/ag.econ.338439?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Robert G. King & Mark W. Watson, 1997. "Testing long-run neutrality," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 69-101.
    2. Bodie, Zvi, 1976. "Common Stocks as a Hedge against Inflation," Journal of Finance, American Finance Association, vol. 31(2), pages 459-470, May.
    3. Andrews, Donald W K & Ploberger, Werner, 1994. "Optimal Tests When a Nuisance Parameter Is Present Only under the Alternative," Econometrica, Econometric Society, vol. 62(6), pages 1383-1414, November.
    4. Nelson, Charles R, 1976. "Inflation and Rates of Return on Common Stocks," Journal of Finance, American Finance Association, vol. 31(2), pages 471-483, May.
    5. Floros, C., 2004. "Stock Returns and Inflation in Greece," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 4(2).
    6. Choudhry, Taufiq, 2001. "Inflation and rates of return on stocks: evidence from high inflation countries," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 11(1), pages 75-96, March.
    7. Geske, Robert & Roll, Richard, 1983. "The Fiscal and Monetary Linkage between Stock Returns and Inflation," Journal of Finance, American Finance Association, vol. 38(1), pages 1-33, March.
    8. Omran, Mohammed & Pointon, John, 2001. "Does the inflation rate affect the performance of the stock market? The case of Egypt," Emerging Markets Review, Elsevier, vol. 2(3), pages 263-279, September.
    9. Xing-Qiu Zhao, 1999. "Stock prices, inflation and output: evidence from China," Applied Economics Letters, Taylor & Francis Journals, vol. 6(8), pages 509-511.
    10. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-856, July.
    11. Tony Caporale & Chulho Jung, 1997. "Inflation and real stock prices," Applied Financial Economics, Taylor & Francis Journals, vol. 7(3), pages 265-266.
    12. Firth, Michael, 1979. "The Relationship between Stock Market Returns and Rates of Inflation," Journal of Finance, American Finance Association, vol. 34(3), pages 743-749, June.
    13. Balcilar, Mehmet & Ozdemir, Zeynel Abidin & Arslanturk, Yalcin, 2010. "Economic growth and energy consumption causal nexus viewed through a bootstrap rolling window," Energy Economics, Elsevier, vol. 32(6), pages 1398-1410, November.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Muhammad Shahbaz & Faridul Islam & Ijaz Ur Rehman, 2016. "Stocks as Hedge against Inflation in Pakistan: Evidence from ARDL Approach," Global Business Review, International Management Institute, vol. 17(6), pages 1280-1295, December.
    2. Somayeh Madadpour & Mohsen Asgari, 2019. "The puzzling relationship between stocks return and inflation: a review article," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 66(2), pages 115-145, June.
    3. George Hondroyiannis & Evangelia Papapetrou, 2006. "Stock returns and inflation in Greece: A Markov switching approach," Review of Financial Economics, John Wiley & Sons, vol. 15(1), pages 76-94.
    4. Du, Ding, 2006. "Monetary policy, stock returns and inflation," Journal of Economics and Business, Elsevier, vol. 58(1), pages 36-54.
    5. Mohammad Hasan, 2008. "Stock returns, inflation and interest rates in the United Kingdom," The European Journal of Finance, Taylor & Francis Journals, vol. 14(8), pages 687-699.
    6. Pesce, Gabriela & Pedroni, Florencia Verónica, 2021. "Inflación y rendimientos en mercados emergentes: el caso de Argentina || Inflation and returns in emerging markets: the case of Argentina," Revista de Métodos Cuantitativos para la Economía y la Empresa = Journal of Quantitative Methods for Economics and Business Administration, Universidad Pablo de Olavide, Department of Quantitative Methods for Economics and Business Administration, vol. 32(1), pages 341-375, December.
    7. Sellin, Peter, 1998. "Monetary Policy and the Stock Market: Theory and Empirical Evidence," Working Paper Series 72, Sveriges Riksbank (Central Bank of Sweden).
    8. Martin Hoesli & Colin Lizieri & Bryan MacGregor, 2008. "The Inflation Hedging Characteristics of US and UK Investments: A Multi-Factor Error Correction Approach," The Journal of Real Estate Finance and Economics, Springer, vol. 36(2), pages 183-206, February.
    9. Bampinas, Georgios & Panagiotidis, Theodore, 2016. "Hedging inflation with individual US stocks: A long-run portfolio analysis," The North American Journal of Economics and Finance, Elsevier, vol. 37(C), pages 374-392.
    10. Adel A. Al-Sharkas & Marwan Al-Zoubi, 2011. "Stock Prices and Inflation: Evidence from Jordan, Saudi Arabia, Kuwait, and Morocco," Working Papers 653, Economic Research Forum, revised 12 Jan 2011.
    11. Nassar S. Al-Nassar & Razzaque H. Bhatti, 2019. "Are common stocks a hedge against inflation in emerging markets?," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 43(3), pages 421-455, July.
    12. Madsen, Jakob B., 2002. "The share market boom and the recent disinflation in the OECD countries: the tax-effects, the inflation-illusion and the risk-aversion hypotheses reconsidered1," The Quarterly Review of Economics and Finance, Elsevier, vol. 42(1), pages 115-141.
    13. Zeynep Onder, 2000. "High inflation and returns on residential real estate: evidence from Turkey," Applied Economics, Taylor & Francis Journals, vol. 32(7), pages 917-931.
    14. Floros, C., 2004. "Stock Returns and Inflation in Greece," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 4(2).
    15. Dalina Amonhaemanon & Jan Annaert & Marc J.K. De Ceuster & Hau Le Long, 2014. "The Fisher Hypothesis and Investment Assets: The Vietnamese and Thai Case," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 5(4), pages 180-195, October.
    16. Dikaios Tserkezos & Eleni Thanou, 2007. "Conventional Nonlinear Relationships between GDP, Inflation and Stock Market Returns. An Investigation for the Greek Economy," Working Papers 0731, University of Crete, Department of Economics.
    17. Martin Hoesli & Colin Lizieri & Bryan MacGregor, 2006. "The Inflation Hedging Characteristics of US and UK Investments:Â A Multi-Factor Error Correction Approach," Real Estate & Planning Working Papers rep-wp2006-01, Henley Business School, University of Reading.
    18. Anyiwe, Mercy Ada & Sunday Osahon Igbinedion, 2015. "Stock Returns, Inflation and the “Reverse Causality†Hypothesis: Evidence from Nigeria," International Journal of Research in Business and Social Science (2147-4478), Center for the Strategic Studies in Business and Finance, vol. 4(1), pages 32-50, January.
    19. K.R. Shanmugam & Biswa Swarup Misra, 2008. "Stock Returns-Inflation Relation In India," Working Papers 2008-038, Madras School of Economics,Chennai,India.
    20. Osuagwu, Eze, 2009. "The Effect Of Monetary Policy On Stock Market Performance In Nigeria," MPRA Paper 112934, University Library of Munich, Germany, revised Jul 2009.

    More about this item

    Keywords

    International Development;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ags:thkase:338439. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: AgEcon Search (email available below). General contact details of provider: https://edirc.repec.org/data/darkuth.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.