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Are Common Stocks A Hedge Against Inflation?

  • Kul B. Luintel
  • Krishna Paudyal

We test whether U.K. common stocks hedge against inflation using a framework of the tax-augmented Fisher hypothesis. Aggregate and disaggregate (seven industry groups) monthly data covering 48 years are used. All pairs of stock and retail price indexes are cointegrated. Tests in most cases reveal significant shifts in the cointegrating vectors, and accounting for these shifts improves the precision of the estimates. The point estimates of goods price elasticity are significantly above unity in all but two cases. These findings, though in sharp contrast to most existing findings that report price elasticity of below unity, appear theoretically more plausible because nominal stock returns must exceed the inflation rate to insulate tax-paying investors. 2006 The Southern Finance Association and the Southwestern Finance Association.

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Article provided by Southern Finance Association & Southwestern Finance Association in its journal Journal of Financial Research.

Volume (Year): 29 (2006)
Issue (Month): 1 ()
Pages: 1-19

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Handle: RePEc:bla:jfnres:v:29:y:2006:i:1:p:1-19
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