The Co-Movement and Long-Run Relationship between Inflation and Stock Returns: Evidence from 12 OECD Countries
This paper carries out the methodology suggested by Den Haan (2000) to investigate the co-movement of inflation and real stock returns using quarterly data from OECD countries. We confirm the existence of both short-run and long-run relationships between inflation and real stock returns, regardless of whether the underlying time series data are purely I(0), purely I(1), or mutually co-integrated. Moreover, we use the confidence interval approach introduced by Stock (1991) to further point out the ambiguity in unit root tests. However, our results support the existence of an inverse co-movement and long-run relationship between these two variables in 12 OECD countries. That is, an increase in inflation depresses real stock prices. This evidence is consistent with both the inflation illusion hypothesis and with the classical view that stock returns should be undervalued to reflect the imbalance in the tax treatment of inventory.
Volume (Year): 5 (2009)
Issue (Month): 2 (July)
|Contact details of provider:|| Postal: 100 Wenhwa Road, Seatwen, Taichung|
Web page: http://www.jem.org.tw/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Vuolteenaho, Tuomo & Campbell, John, 2004.
"Inflation Illusion and Stock Prices,"
3196090, Harvard University Department of Economics.
- Serena Ng & Pierre Perron, 1997.
"Lag Length Selection and the Construction of Unit Root Tests with Good Size and Power,"
Boston College Working Papers in Economics
369, Boston College Department of Economics, revised 01 Sep 2000.
- Serena Ng & Pierre Perron, 2001. "LAG Length Selection and the Construction of Unit Root Tests with Good Size and Power," Econometrica, Econometric Society, vol. 69(6), pages 1519-1554, November.
- Stulz, Rene M, 1986. " Asset Pricing and Expected Inflation," Journal of Finance, American Finance Association, vol. 41(1), pages 209-223, March.
- Ram, Rati & Spencer, David E, 1983. "Stock Returns, Real Activity, Inflation, and Money: Comment," American Economic Review, American Economic Association, vol. 73(3), pages 463-470, June.
- Rapach, David E., 2002. "The long-run relationship between inflation and real stock prices," Journal of Macroeconomics, Elsevier, vol. 24(3), pages 331-351, September.
- Campbell, John & Mankiw, Gregory, 1987.
"Are Output Fluctuations Transitory?,"
3122545, Harvard University Department of Economics.
- den Haan, Wouter J., 2000.
"The comovement between output and prices,"
Journal of Monetary Economics,
Elsevier, vol. 46(1), pages 3-30, August.
- Tom Doan, "undated". "RATS programs to replicate Den Haan JME(2000) correlation of comovements," Statistical Software Components RTZ00042, Boston College Department of Economics.
- 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 1057-1072, June.
- Den Haan, Wouter & Sumner, Steven, 2001.
"The Comovements between Real Activity and Prices in the G7,"
CEPR Discussion Papers
2801, C.E.P.R. Discussion Papers.
- den Haan, Wouter J. & Sumner, Steven W., 2004. "The comovement between real activity and prices in the G7," European Economic Review, Elsevier, vol. 48(6), pages 1333-1347, December.
- Wouter J. Den Haan & Steven Sumner, 2001. "The Comovements between Real Activity and Prices in the G7," NBER Working Papers 8195, National Bureau of Economic Research, Inc.
- Fisher, Mark E & Seater, John J, 1993. "Long-Run Neutrality and Superneutrality in an ARIMA Framework," American Economic Review, American Economic Association, vol. 83(3), pages 402-415, June.
- Martin Feldstein, 1978.
"Inflation and the Stock Market,"
NBER Working Papers
0276, National Bureau of Economic Research, Inc.
- Martin Feldstein, 1983. "Inflation and the Stock Market," NBER Chapters, in: Inflation, Tax Rules, and Capital Formation, pages 186-198 National Bureau of Economic Research, Inc.
- Feldstein, Martin, 1980. "Inflation and the Stock Market," American Economic Review, American Economic Association, vol. 70(5), pages 839-847, December.
- Gallagher, Liam A. & Taylor, Mark P., 2002. "The stock return-inflation puzzle revisited," Economics Letters, Elsevier, vol. 75(2), pages 147-156, April.
- Lee, Bong-Soo, 1992. " Causal Relations among Stock Returns, Interest Rates, Real Activity, and Inflation," Journal of Finance, American Finance Association, vol. 47(4), pages 1591-1603, September.
- Fama, Eugene F, 1981. "Stock Returns, Real Activity, Inflation, and Money," American Economic Review, American Economic Association, vol. 71(4), pages 545-565, September.
- Randolph B. Cohen & Christopher Polk & Tuomo Vuolteenaho, 2005. "Money Illusion in the Stock Market: The Modigliani-Cohn Hypothesis," The Quarterly Journal of Economics, Oxford University Press, vol. 120(2), pages 639-668.
- Tony Caporale & Chulho Jung, 1997. "Inflation and real stock prices," Applied Financial Economics, Taylor & Francis Journals, vol. 7(3), pages 265-266.
- Cochrane, John H, 1988. "How Big Is the Random Walk in GNP?," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 893-920, October.
- Fama, Eugene F. & Schwert, G. William, 1977. "Asset returns and inflation," Journal of Financial Economics, Elsevier, vol. 5(2), pages 115-146, November.
- M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
- Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-1580, November.
- Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
- Stock, James H., 1991.
"Confidence intervals for the largest autoregressive root in U.S. macroeconomic time series,"
Journal of Monetary Economics,
Elsevier, vol. 28(3), pages 435-459, December.
- James H. Stock, 1991. "Confidence Intervals for the Largest Autoresgressive Root in U.S. Macroeconomic Time Series," NBER Technical Working Papers 0105, National Bureau of Economic Research, Inc.
- Bahmani-Oskooee, Mohsen, 1998. "Do exchange rates follow a random walk process in Middle Eastern countries?," Economics Letters, Elsevier, vol. 58(3), pages 339-344, March.
- Kim, Jeong-Ryeol, 2003. "The stock return-inflation puzzle and the asymmetric causality in stock returns, inflation and real activity," Economics Letters, Elsevier, vol. 80(2), pages 155-160, August.
- Kim, Jeong-Ryeol, 2003. "The stock return-inflation puzzle and the asymmetric causality in stock returns, inflation and real activity," Discussion Paper Series 1: Economic Studies 2003,03, Deutsche Bundesbank, Research Centre.
When requesting a correction, please mention this item's handle: RePEc:jec:journl:v:5:y:2009:i:2:p:167-186. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Yi-Ju Su)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.