Performance of Common Stock Market and Relationship between Common Stock Return and Inflation: A Bhutanese Case Study

The stock exchange of Bhutan is considered one of the smallest stock markets in the world with market capitalization of BTN 49 billion1. Since the inception of the stock exchange in 1993 to facilitate trading of both equity and debt securities, the performance of stock market with respect to the macroeconomic variables have not been studied by academicians and researchers in Bhutan. Similar to the asset-inflation relationship studies conducted in different countries, the objective of this research is in providing insights on the hedging features of the common stock returns against inflation as per the classical Fisher hypothesis postulated by Irving Fisher in 1930s. For this study, we selected nine different companies listed on the stock exchange and grouped them into banks, insurance and industry sectors. The data on the monthly consumer price index inflation rates is retrieved from the website of the National Statistics Bureau of Bhutan, and daily market closing price from website of the Royal Securities Exchange of Bhutan. To test the hypothesis, we used bivariate regression analysis for different groups of sectors. Other relevant information on the descriptive statistics of the nominal common stock returns and its variability with respect to the inflation is also discussed. Our result shows that the nominal common stock return does not act as a hedge against inflation. In addition, our study indicates a weak inverse relationship between the nominal common stock return and inflation, though the result is not statistically significant to support the negative relationship between the two.