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The long-run relationship between inflation and real stock prices: empirical evidence from South Africa

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  • Riona Arjoon
  • Mari�tte Botes
  • Laban K. Chesang
  • Rangan Gupta

Abstract

The existing literature on the theoretical relationship between the rate of inflation and real stock prices in an economy has shown varied predictions about the long run effects of inflation on real stock prices. In this paper, we present some time series evidence on this issue using South African data, by applying the structural bivariate vector autoregressive (VAR) methodology proposed by King and Watson (1997). Our empirical results provide considerable support of the view that, in the long run real stock prices are invariant to permanent changes in the rate of inflation. The impulse responses reveal a positive real stock price response to a permanent inflation shock in the long run, indicating that any deviations in short run real stock prices will be corrected towards the long run value. It is therefore concluded that inflation does not lower the real value of stocks in South Africa, at least in the long run.

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File URL: http://hdl.handle.net/10.3846/16111699.2011.620162
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Journal of Business Economics and Management.

Volume (Year): 13 (2011)
Issue (Month): 4 (July)
Pages: 600-613

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Handle: RePEc:taf:jbemgt:v:13:y:2011:i:4:p:600-613

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  1. H.a. Mitchell-innes & M.j. Aziakpono & A.p. Faure, 2007. "Inflation Targeting And The Fisher Effect In South Africa: An Empirical Investigation," South African Journal of Economics, Economic Society of South Africa, vol. 75(4), pages 693-707, December.
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Cited by:
  1. Yu Hsing, 2011. "The Stock Market and Macroeconomic Variables in a BRICS Country and Policy Implications," International Journal of Economics and Financial Issues, Econjournals, vol. 1(1), pages 12-18.

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