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Are stocks a good hedge against inflation? evidence from emerging markets

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  • S. I. Spyrou

Abstract

Theory suggests that equities are a good hedge against inflation. However, most of the empirical evidence for industrialized economies suggests that the relationship between stock returns and inflation is negative. One explanation is the negative correlation between inflation and real output growth. This paper examines the relationship between inflation and stock returns for ten important Emerging Stock Market (ESM) markets, namely, Chile, Mexico, Brazil, Argentina, Thailand, S. Korea, Malaysia, Hong Kong, Philippines and Turkey, during the 1990s. To anticipate the results, the relationship between stock returns and inflation, for the whole sample period, is positive and statistically significant for three of the sample ESMs, while it is positive (but statistically insignificant) for a further three. Only for one ESM is the relationship negative and statistically significant. This result may be due to the role of money and the positive relationship between consumer prices and output.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/0003684042000177189
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 36 (2004)
Issue (Month): 1 ()
Pages: 41-48

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Handle: RePEc:taf:applec:v:36:y:2004:i:1:p:41-48

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References

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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. 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.
  3. Arjun Chatrath & Sanjay Ramchander & Frank Song, 1997. "Stock prices, inflation and output: evidence from India," Applied Financial Economics, Taylor & Francis Journals, vol. 7(4), pages 439-445.
  4. Ely, David P. & Robinson, Kenneth J., 1992. "Stock returns and inflation: Further tests of the role of the central bank," Journal of Macroeconomics, Elsevier, vol. 14(3), pages 525-543.
  5. Danthine, Jean-Pierre & Donaldson, John B, 1986. "Inflation and Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 54(3), pages 585-605, May.
  6. Corhay, A. & Tourani Rad, A. & Urbain, J. -P., 1993. "Common stochastic trends in European stock markets," Economics Letters, Elsevier, vol. 42(4), pages 385-390.
  7. Fama, Eugene F. & Schwert, G. William, 1977. "Asset returns and inflation," Journal of Financial Economics, Elsevier, vol. 5(2), pages 115-146, November.
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Cited by:
  1. Shahbaz, Muhammad & Islam, Faridul, 2010. "Stocks as Hedge against Inflation in Pakistan: Evidence from ARDL Approach," MPRA Paper 30970, University Library of Munich, Germany, revised 23 Mar 2011.
  2. K.R. Shanmugam & Biswa Swarup Misra, 2008. "Stock Returns-Inflation Relation In India," Working Papers 2008-038, Madras School of Economics,Chennai,India.
  3. Durré, Alain & Giot, Pierre, 2005. "An international analysis of earnings, stock prices and bond yields," Working Paper Series 0515, European Central Bank.
  4. Shaun K. Roache & Alexander P. Attie, 2009. "Inflation Hedging for Long-Term Investors," IMF Working Papers 09/90, International Monetary Fund.
  5. Giot, Pierre & Petitjean, Mikael, 2007. "The information content of the Bond-Equity Yield Ratio: Better than a random walk?," International Journal of Forecasting, Elsevier, vol. 23(2), pages 289-305.
  6. Hondroyiannis, George & Papapetrou, Evangelia, 2006. "Stock returns and inflation in Greece: A Markov switching approach," Review of Financial Economics, Elsevier, vol. 15(1), pages 76-94.
  7. Quayes, Shakil, 2010. "Does budget deficit lower equity prices in USA?," Economics Letters, Elsevier, vol. 107(2), pages 155-157, May.

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