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Do Stock Returns Hedge against High and Low Inflation? Evidence from Brazilian Companies

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  • Taufiq Choudhry
  • Rene Coppe Pimentel
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    Abstract

    This paper investigates the relationship between stock returns and inflation using monthly data from ten Brazilian firms and the general Brazilian stock market. The period under investigation, 1986-2008, includes periods of unstable high inflation (1986-1994) and stable low inflation (1994-2008). Standard linear regressions are applied to estimate the relationship after testing first for the stochastic structure of the variables. Results indicate that stock returns do act as a hedge against high inflation but fail to act against low inflation. Variance decomposition tests indicate innovations to the inflation rate affect the movement of the stock returns during the total period and the high inflation period.

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    Bibliographic Info

    Article provided by Academia de Studii Economice din Bucuresti, Romania / Facultatea de Finante, Asigurari, Banci si Burse de Valori / Catedra de Finante in its journal The Review of Finance and Banking.

    Volume (Year): 02 (2010)
    Issue (Month): 2 (December)
    Pages: 061-076

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    Handle: RePEc:rfb:journl:v:02:y:2010:i:2:p:061-076

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    1. Peter Blair Henry, 2001. "Is Disinflation Good for the Stock Market?," NBER Working Papers 8289, National Bureau of Economic Research, Inc.
    2. Brooks,Chris, 2008. "Introductory Econometrics for Finance," Cambridge Books, Cambridge University Press, number 9780521694681.
    3. 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.
    4. Boucher, Christophe, 2006. "Stock prices-inflation puzzle and the predictability of stock market returns," Economics Letters, Elsevier, vol. 90(2), pages 205-212, February.
    5. 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.
    6. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
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