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Time-Varying Correlations between Inflation and Stock Prices in the United States over the Last Two Centuries

Author

Listed:
  • Nikolaos Antonakakis

    (Department of Economics and Finance, University of Portsmouth; Department of Business and Management, Webster Vienna Private University and Department of Economics, Johannes Kepler University)

  • Rangan Gupta

    (Department of Economics, University of Pretoria)

  • Aviral K. Tiwari

    (Faculty of Management, IBS Hyderabad, IFHE University, India)

Abstract

The relationship between stock prices and the inflation can be either negative or positive, depending on the strengths of various theoretical channels at work. While previous studies have primarily examined this relationship in a time-invariant framework, and if at all a time-varying framework is used, it has been restricted to the post World War II period. Given this, we employ a time-varying approach to examine the dynamic correlations of inflation and stock prices in the United States over the period of 1791 to 2015. The results of our empirical analysis reveal that correlations between the inflation and stock prices in the United States evolve heterogeneously overtime. In particular, the correlations are significantly positive in the 1840s, 1860s, 1930s and 2011, and significantly negative otherwise. The policy implications of these findings are then discussed.

Suggested Citation

  • Nikolaos Antonakakis & Rangan Gupta & Aviral K. Tiwari, 2016. "Time-Varying Correlations between Inflation and Stock Prices in the United States over the Last Two Centuries," Working Papers 201605, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:201605
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    References listed on IDEAS

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    2. Zarei, Samira, 2020. "Analyzing the Asymmetric Effects of Inflation and Exchange Rate Misalignments on the Petrochemical Stock index: The Case of Iran," MPRA Paper 99101, University Library of Munich, Germany.

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    More about this item

    Keywords

    Conditional correlation; GARCH; Inflation and Stock Price Comovement; US Economy;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G1 - Financial Economics - - General Financial Markets
    • N1 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations

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