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Generalized Fama proxy hypothesis: Impact of shocks on Phillips curve and relation of stock returns with inflation

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  • Kryzanowski, Lawrence
  • Rahman, Abdul H.
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    Abstract

    A generalized version of Fama's proxy hypothesis identifies a downward bias in Phillips curve estimations. The (spurious) negative relation between real stock returns and inflation emerges if output rate fluctuations dominate cyclical component fluctuations of a Lucas-type Phillips curve.

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    File URL: http://www.sciencedirect.com/science/article/B6V84-4VW550B-1/2/771c0fd2230eca797dbc2376e4607ddb
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    Bibliographic Info

    Article provided by Elsevier in its journal Economics Letters.

    Volume (Year): 103 (2009)
    Issue (Month): 3 (June)
    Pages: 135-137

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    Handle: RePEc:eee:ecolet:v:103:y:2009:i:3:p:135-137

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    Web page: http://www.elsevier.com/locate/ecolet

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    Keywords: Proxy hypothesis Inflation Stock returns;

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    1. Anari, Ali & Kolari, James, 1999. "Nonmonetary effects of the financial crisis in the Great Depression," Journal of Economics and Business, Elsevier, vol. 51(3), pages 215-235, May.
    2. Kaul, Gautam, 1987. "Stock returns and inflation : The role of the monetary sector," Journal of Financial Economics, Elsevier, vol. 18(2), pages 253-276, June.
    3. Jeffrey C. Fuhrer, 1995. "The Phillips curve is alive and well," New England Economic Review, Federal Reserve Bank of Boston, issue Mar, pages 41-56.
    4. Kaul, Gautam, 1990. "Monetary Regimes and the Relation between Stock Returns and Inflationary Expectations," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 25(03), pages 307-321, September.
    5. Fama, Eugene F, 1981. "Stock Returns, Real Activity, Inflation, and Money," American Economic Review, American Economic Association, vol. 71(4), pages 545-65, September.
    6. Jaffe, Jeffrey F & Mandelker, Gershon, 1976. "The "Fisher Effect" for Risky Assets: An Empirical Investigation," Journal of Finance, American Finance Association, vol. 31(2), pages 447-58, May.
    7. Boudoukh, Jacob & Richardson, Matthew, 1993. "Stock Returns and Inflation: A Long-Horizon Perspective," American Economic Review, American Economic Association, vol. 83(5), pages 1346-55, December.
    8. Barry V. Cozier & Abdul H. Rahman, 1988. "Stock Returns, Inflation, and Real Activity in Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 21(4), pages 759-74, November.
    9. Marshall, David A, 1992. " Inflation and Asset Returns in a Monetary Economy," Journal of Finance, American Finance Association, vol. 47(4), pages 1315-42, September.
    10. Rapach, David E., 2001. "Macro shocks and real stock prices," Journal of Economics and Business, Elsevier, vol. 53(1), pages 5-26.
    11. Nelson, Charles R, 1976. "Inflation and Rates of Return on Common Stocks," Journal of Finance, American Finance Association, vol. 31(2), pages 471-83, May.
    12. Gallagher, Liam A. & Taylor, Mark P., 2002. "The stock return-inflation puzzle revisited," Economics Letters, Elsevier, vol. 75(2), pages 147-156, April.
    13. Ely, David P. & Robinson, Kenneth J., 1997. "Are stocks a hedge against inflation? International evidence using a long-run approach," Journal of International Money and Finance, Elsevier, vol. 16(1), pages 141-167, February.
    14. Hess, Patrick J & Lee, Bong-Soo, 1999. "Stock Returns and Inflation with Supply and Demand Disturbances," Review of Financial Studies, Society for Financial Studies, vol. 12(5), pages 1203-18.
    15. Bodie, Zvi, 1976. "Common Stocks as a Hedge against Inflation," Journal of Finance, American Finance Association, vol. 31(2), pages 459-70, May.
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