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Stock Returns-Inflation Relation In India, 1980-2004

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Author Info
SHANMUGAM, K.R. ()
MISRA, Biswa Swarup ()
Abstract

This study contributes to the stock returns-inflation relation literature in developing countries by revisiting the issue with reference to an emerging economy, namely India. More specifically, it tests whether the Indian stock market provides an effective hedge against inflation using monthly data on real stock return, inflation and real activity from April 1980 to March 2004 and a two-step estimation procedure. Results of the study indicate that (i) the Indian stock market reflects future real activity; (ii) the negative stock returns-inflation relation emerges from the unexpected component of the inflation and (iii) this negative relation vanishes when we control for the inflation-real activity relation, thereby providing a strong support for Fama’s proxy effect hypothesis. The split period analyses provided support for accepting Fama’s hypothesis only in pre-reform period. In the post reform period, stock market serves as a hedge against inflation.

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Article provided by Euro-American Association of Economic Development in its journal Applied Econometrics and International Development.

Volume (Year): 9 (2009)
Issue (Month): 1 ()
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Handle: RePEc:eaa:aeinde:v:9:y:2009:i:1_17

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Related research
Keywords: Stock Return; Inflation; Fama’s proxy effect hypothesis; hedge;

Find related papers by JEL classification:
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
E - Macroeconomics and Monetary Economics

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  1. Bodie, Zvi, 1976. "Common Stocks as a Hedge against Inflation," Journal of Finance, American Finance Association, vol. 31(2), pages 459-70, May. [Downloadable!] (restricted)
  2. Gultekin, N Bulent, 1983. " Stock Market Returns and Inflation: Evidence from Other Countries," Journal of Finance, American Finance Association, vol. 38(1), pages 49-65, March. [Downloadable!] (restricted)
  3. Chatrath, Arjun & Ramchander, Sanjay & Song, Frank, 1997. "Stock Prices, Inflation and Output: Evidence from India," Applied Financial Economics, Taylor and Francis Journals, vol. 7(4), pages 439-45, August. [Downloadable!] (restricted)
  4. Floros, C., 2004. "Stock Returns and Inflation in Greece," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 4(2). [Downloadable!]
  5. 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. [Downloadable!] (restricted)
  6. Feldstein, Martin, 1980. "Inflation and the Stock Market," American Economic Review, American Economic Association, vol. 70(5), pages 839-47, December. [Downloadable!] (restricted)
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  7. Aarstol, Michael, 2000. "Inflation, agency costs, and equity returns," Journal of Economics and Business, Elsevier, vol. 52(5), pages 387-403. [Downloadable!] (restricted)
  8. Lintner, John, 1975. "Inflation and Security Returns," Journal of Finance, American Finance Association, vol. 30(2), pages 259-80, May. [Downloadable!] (restricted)
  9. Fama, Eugene F, 1981. "Stock Returns, Real Activity, Inflation, and Money," American Economic Review, American Economic Association, vol. 71(4), pages 545-65, September. [Downloadable!] (restricted)
  10. Fama, Eugene F, 1982. "Inflation, Output, and Money," Journal of Business, University of Chicago Press, vol. 55(2), pages 201-31, April. [Downloadable!] (restricted)
  11. Firth, Michael, 1979. "The Relationship between Stock Market Returns and Rates of Inflation," Journal of Finance, American Finance Association, vol. 34(3), pages 743-49, June. [Downloadable!] (restricted)
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