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The Analysis of the Relationship between Stock Returns and Inflation: A Consequence of Real Shocks or Money Illusion?
[Analýza vztahu akciových výnosů a inflace: důsledek reálných šoků nebo peněžní iluze?]

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  • David Havlíček

Abstract

The study analyzes the negative relationship between stock market returns and inflation. This finding is contrary to the standard view of the stock as an instrument for hedging of property against rising prices. The paper aims to summarize the main theoretical explanations for this relationship and replicates with the empirical data from the United States and the Czech Republic earlier study explaining the relationship with a string of fiscal and monetary reasons. The study used standard correlation and regression analysis. Results of the study for the most part did not confirm earlier conclusions about a possible explanation of the negative relationship between inflation and stock returns with those reasons.

Suggested Citation

  • David Havlíček, 2011. "The Analysis of the Relationship between Stock Returns and Inflation: A Consequence of Real Shocks or Money Illusion? [Analýza vztahu akciových výnosů a inflace: důsledek reálných šoků nebo peněžní," Český finanční a účetní časopis, Prague University of Economics and Business, vol. 2011(2), pages 37-57.
    • Handle: RePEc:prg:jnlcfu:v:2011:y:2011:i:2:id:104:p:37-57
    DOI: 10.18267/j.cfuc.104
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    References listed on IDEAS

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    1. 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.
    2. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    3. Day, Theodore E, 1984. "Real Stock Returns and Inflation," Journal of Finance, American Finance Association, vol. 39(2), pages 493-502, June.
    4. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-291, March.
    5. Ernst Fehr & Jean-Robert Tyran, 2001. "Does Money Illusion Matter?," American Economic Review, American Economic Association, vol. 91(5), pages 1239-1262, December.
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    More about this item

    Keywords

    Stock returns; Inflation; Money illusion; Real shocks; Behavioral finance; Výnosnost akcií; Inflace; Peněžní iluze; Reálné šoky; Behaviorální finance;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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