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Inflation And Real Stock Returns Revisited

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  • SHU‐CHIN LIN

Abstract

The article uses the (unbalanced) panel data to revisit the effects of expected inflation, unexpected inflation, and inflation uncertainty on real stock returns. The empirical results are obtained via the pooled mean group estimator, which can be applied to I(1) and/or I(0) variables, and can distinguish long‐ and short‐run effects. Using a panel of 16 industrialized Organization for Economic Cooperation and Development countries over the 1957:Q1 to 2000:Q1 period, we find that anticipated inflation and inflation uncertainty tend to have insignificant short‐run effects, while they appear to have negative long‐run impacts on real stock returns. Moreover, we find coexistence of a negative long‐run effect and a positive short‐run effect of unanticipated inflation on real stock returns. These findings help clarify the conflicting conclusions of both empirical and theoretical studies on this issue. (JEL C23, E31, G12)

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  • Shu‐Chin Lin, 2009. "Inflation And Real Stock Returns Revisited," Economic Inquiry, Western Economic Association International, vol. 47(4), pages 783-795, October.
    • Handle: RePEc:bla:ecinqu:v:47:y:2009:i:4:p:783-795
    DOI: 10.1111/j.1465-7295.2008.00193.x
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    2. Konrad Farrugia & Janice Duca & Peter J. Baldacchino & Simon Grima, 2021. "The Relationship between Inflation and Stock Returns in a Small Island State: An Analysis," International Journal of Finance, Insurance and Risk Management, International Journal of Finance, Insurance and Risk Management, vol. 11(2), pages 51-78.
    3. Kim, Dong-Hyeon & Lin, Shu-Chin & Suen, Yu-Bo, 2010. "Dynamic effects of trade openness on financial development," Economic Modelling, Elsevier, vol. 27(1), pages 254-261, January.
    4. Bee-Hoong Tay & Pei-Tha Gan, 2016. "The Determinants of Investment Rewards: Evidence for Selected Developed and Developing Countries," International Journal of Economics and Financial Issues, Econjournals, vol. 6(3), pages 1180-1188.
    5. Rene Coppe Pimentel & Taufiq Choudhry, 2014. "Stock Returns Under High Inflation and Interest Rates: Evidence from the Brazilian Market," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 50(1), pages 71-92, January.
    6. Atilla Cifter, 2015. "Stock Returns, Inflation, and Real Activity in Developing Countries: A Markov-Switching Approach," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 62(1), pages 55-76, March.
    7. Rushdi, Mustabshira & Kim, Jae H. & Silvapulle, Param, 2012. "ARDL bounds tests and robust inference for the long run relationship between real stock returns and inflation in Australia," Economic Modelling, Elsevier, vol. 29(3), pages 535-543.

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    More about this item

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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