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Stock returns and Inflation in Pakistan

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  • Mohamed Arouri
  • Aviral Kumar Tiwari
  • Arif Billah Dar
  • Niyati Bhanja
  • FrédéricTeulon

Abstract

The nexus between stock return and inflation is assessed for Pakistan using the methodology of frequency based causality and continuous wavelet transform over a long sample period 1961:M07 - 2012:M02. The preliminary investigation using the frequency based causality suggests interdependence of stock return and inflation. Our deeper investigation using the tools of wavelet coherency and wavelet phase angle in the continuous wavelet transform framework, however, explore dependency between stock returns and inflation over certain time periods; especially for lower time scales. For higher time scales, the study finds stock returns and inflation to be in the phase (positively related) when consumers’ price inflation is considered and independent when producers’ price inflation is utilized. Overall results based on both the inflation measures indicate that, inflation does not erode the value of stocks in Pakistan and stocks could be used as hedge against inflation at least in the long-run.

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Bibliographic Info

Paper provided by Department of Research, Ipag Business School in its series Working Papers with number 2014-108.

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Length: 25 pages
Date of creation: 25 Feb 2014
Date of revision:
Handle: RePEc:ipg:wpaper:2014-108

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Keywords: Stock prices; inflation; Fisher effect; Pakistan stock market; frequency domain causality; wavelet coherency;

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  1. David P. Ely & Kenneth J. Robinson, 1989. "The stock market and inflation: a synthesis of the theory and evidence," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Mar, pages 17-29.
  2. Fama, Eugene F, 1981. "Stock Returns, Real Activity, Inflation, and Money," American Economic Review, American Economic Association, vol. 71(4), pages 545-65, September.
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  6. Niyati Bhanja & Arif Billah Dar & Aviral Kumar Tiwari & Olaolu Richard Olayeni, 2012. "Are Stock Prices Hedge Against Inflation? A Revisit over Time and Frequencies in India," Central European Journal of Economic Modelling and Econometrics, CEJEME, vol. 4(3), pages 199-213, September.
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