The Co-Movement and Long-Run Relationship between Inflation and Stock Returns: Evidence from 12 OECD Countries
AbstractThis paper carries out the methodology suggested by Den Haan (2000) to investigate the co-movement of inflation and real stock returns using quarterly data from OECD countries. We confirm the existence of both short-run and long-run relationships between inflation and real stock returns, regardless of whether the underlying time series data are purely I(0), purely I(1), or mutually co-integrated. Moreover, we use the confidence interval approach introduced by Stock (1991) to further point out the ambiguity in unit root tests. However, our results support the existence of an inverse co-movement and long-run relationship between these two variables in 12 OECD countries. That is, an increase in inflation depresses real stock prices. This evidence is consistent with both the inflation illusion hypothesis and with the classical view that stock returns should be undervalued to reflect the imbalance in the tax treatment of inventory.
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Bibliographic InfoArticle provided by College of Business, Feng Chia University, Taiwan in its journal Journal of Economics and Management.
Volume (Year): 5 (2009)
Issue (Month): 2 (July)
inflation; stock returns; co-movement; ARDL-ECM;
Find related papers by JEL classification:
- C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Longitudinal Data; Spatial Time Series
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
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