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Stock Returns and Inflation in Greece

  • Floros, C.

This paper examines the relationship between stock returns and inflation. We focus on various econometric techniques to test this relationship, using monthly values of the Athens Stock Exchange Price index and the Greek Consumer Price index over the period 1988-2002. The results from a simple OLS model show evidence of a positive but not significant relationship, while when we consider a system of equations including lagged values of inflation we find a negative but not significant effect of lagged inflation to stock returns. Using the Johansen cointegration test, we find that there is no long-run relationship between stock returns and inflation in Greece. The results indicate that the inflation rate is not correlated with stock returns. Finally, from a dynamic point of view, the Granger-Causality tests indicate evidence of no causality among these variables.

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File URL: http://www.usc.es/economet/reviews/aeid424.pdf
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Article provided by Euro-American Association of Economic Development in its journal Applied Econometrics and International Development.

Volume (Year): 4 (2004)
Issue (Month): 2 ()
Pages:

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Handle: RePEc:eaa:aeinde:v:4:y:2004:i:1_12
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  1. Gallagher, Liam A. & Taylor, Mark P., 2002. "The stock return-inflation puzzle revisited," Economics Letters, Elsevier, vol. 75(2), pages 147-156, April.
  2. Gurdip S. Bakshi & Zhiwu Chen, 1998. "Inflation, Asset Prices and the Term Structure of Interest Rates in Monetary Economies," Yale School of Management Working Papers ysm44, Yale School of Management.
  3. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
  4. Tony Caporale & Chulho Jung, 1997. "Inflation and real stock prices," Applied Financial Economics, Taylor & Francis Journals, vol. 7(3), pages 265-266.
  5. Choudhry, Taufiq, 2001. "Inflation and rates of return on stocks: evidence from high inflation countries," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 11(1), pages 75-96, March.
  6. Spyros Spyrou, 2001. "Stock returns and inflation: evidence from an emerging market," Applied Economics Letters, Taylor & Francis Journals, vol. 8(7), pages 447-450.
  7. Fama, Eugene F, 1981. "Stock Returns, Real Activity, Inflation, and Money," American Economic Review, American Economic Association, vol. 71(4), pages 545-65, September.
  8. Nelson, Charles R, 1976. "Inflation and Rates of Return on Common Stocks," Journal of Finance, American Finance Association, vol. 31(2), pages 471-83, May.
  9. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
  10. Bodie, Zvi, 1976. "Common Stocks as a Hedge against Inflation," Journal of Finance, American Finance Association, vol. 31(2), pages 459-70, May.
  11. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
  12. Fama, Eugene F. & Schwert, G. William, 1977. "Asset returns and inflation," Journal of Financial Economics, Elsevier, vol. 5(2), pages 115-146, November.
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