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Pitfalls in Estimates of Relationship between Share Returns and Inflation

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Author Info
Jakob B. Madsen (Institute of Economics, University of Copenhagen)

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Abstract

Empirical tests of the Fisher hypothesis give conflicting results, regardless of whether income growth is accommodated in the estimates. This paper shows theoretically and empirically that standard methods of testing the Fisher hypothesis give biased results and that the bias depends on the specification of the Fisher equation, the process governing inflation, measurement of inflation expectations, and the time aggregation of the data. Alternative tests show that share markets take several years to adjust to innovations in inflation and therefore that the Fisher hypothesis cannot be maintained.

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Publisher Info
Paper provided by University of Copenhagen. Department of Economics. Finance Research Unit in its series FRU Working Papers with number 2004/07.

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Length: 16 pages
Date of creation: Oct 2004
Date of revision:
Handle: RePEc:kud:kuiefr:200407

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Related research
Keywords: Fisher hypothesis; share returns; inflation persistence;

Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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    Other versions:
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