IDEAS home Printed from https://ideas.repec.org/a/sae/emffin/v2y2003i3p287-314.html
   My bibliography  Save this article

Stock Prices, Inflation, and Output: Evidence from the Emerging Markets

Author

Listed:
  • Osamah M. Al-Khazali

Abstract

This article examines the short and long-term relationships between stock prices, inflation, and output in 21 emerging capital markets. It also investigates whether the proxy hypothesis can explain the puzzling negative relation between stock returns and inflation. The study shows that in the short run the negative relationship between stock returns and inflation still persist for all countries except Malaysia, even after the effects of expected economic activity and inflation variability have been explicitly incorporated. Furthermore, the results of the generalised autoregressive conditional heteroscedastic (GA R CH) model are consistent with the OLS results. These results reject the proxy-effect hypothesis in the short run. However, in the long run, cointegration tests verify a long-run equilibrium between stock prices, consumer price index, and the real economic activity. The findings support the Fisher effect and the proxy hypotheses in the long run only.

Suggested Citation

  • Osamah M. Al-Khazali, 2003. "Stock Prices, Inflation, and Output: Evidence from the Emerging Markets," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 2(3), pages 287-314, September.
  • Handle: RePEc:sae:emffin:v:2:y:2003:i:3:p:287-314
    DOI: 10.1177/097265270300200302
    as

    Download full text from publisher

    File URL: https://journals.sagepub.com/doi/10.1177/097265270300200302
    Download Restriction: no

    File URL: https://libkey.io/10.1177/097265270300200302?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Khil, Jaeuk & Lee, Bong-Soo, 2000. "Are common stocks a good hedge against inflation? Evidence from the Pacific-rim countries," Pacific-Basin Finance Journal, Elsevier, vol. 8(3-4), pages 457-482, July.
    2. McCarthy, Joseph & Najand, Mohammad & Seifert, Bruce, 1990. "Empirical Tests of the Proxy Hypothesis," The Financial Review, Eastern Finance Association, vol. 25(2), pages 251-263, May.
    3. Solnik, Bruno, 1983. "The Relation between Stock Prices and Inflationary Expectations: The International Evidence," Journal of Finance, American Finance Association, vol. 38(1), pages 35-48, March.
    4. 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.
    5. Kaul, Gautam & Seyhun, H Nejat, 1990. "Relative Price Variability, Real Shocks, and the Stock Market," Journal of Finance, American Finance Association, vol. 45(2), pages 479-496, June.
    6. Liu, Y Angela & Hsueh, L Paul & Clayton, Ronnie J, 1993. "A Re-examination of the Proxy Hypothesis," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 16(3), pages 261-268, Fall.
    7. Fama, Eugene F, 1981. "Stock Returns, Real Activity, Inflation, and Money," American Economic Review, American Economic Association, vol. 71(4), pages 545-565, September.
    8. Perron, Pierre, 1988. "Trends and random walks in macroeconomic time series : Further evidence from a new approach," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 297-332.
    9. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    10. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 39(3), pages 106-135.
    11. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    12. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    13. Cukierman, Alex, 1983. "Relative price variability and inflation: A survey and further results," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 19(1), pages 103-157, January.
    14. Perron, Pierre, 1990. "Testing for a Unit Root in a Time Series with a Changing Mean," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(2), pages 153-162, April.
    15. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
    16. Kaul, Gautam, 1987. "Stock returns and inflation : The role of the monetary sector," Journal of Financial Economics, Elsevier, vol. 18(2), pages 253-276, June.
    17. 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.
    18. Malkiel, Burton G, 1979. "The Capital Formation Problem in the United States," Journal of Finance, American Finance Association, vol. 34(2), pages 291-306, May.
    19. Fama, Eugene F. & Schwert, G. William, 1977. "Asset returns and inflation," Journal of Financial Economics, Elsevier, vol. 5(2), pages 115-146, November.
    20. Osterwald-Lenum, Michael, 1992. "A Note with Quantiles of the Asymptotic Distribution of the Maximum Likelihood Cointegration Rank Test Statistics," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 461-472, August.
    21. Geske, Robert & Roll, Richard, 1983. "The Fiscal and Monetary Linkage between Stock Returns and Inflation," Journal of Finance, American Finance Association, vol. 38(1), pages 1-33, March.
    22. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
    23. Friedman, Milton, 1977. "Nobel Lecture: Inflation and Unemployment," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 451-472, June.
    24. Y. Angela Liu & L. Paul Hsueh & Ronnie J. Clayton, 1993. "A Re-Examination Of The Proxy Hypothesis," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 16(3), pages 261-268, September.
    25. Lintner, John, 1975. "Inflation and Security Returns," Journal of Finance, American Finance Association, vol. 30(2), pages 259-280, May.
    26. Gultekin, N Bulent, 1983. "Stock Market Returns and Inflation: Evidence from Other Countries," Journal of Finance, American Finance Association, vol. 38(1), pages 49-65, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Iorember, Paul & Sokpo, Joseph & Usar, Terzungwe, 2017. "Inflation and Stock Market Returns Volatility: Evidence from the Nigerian Stock Exchange 1995Q1-2016Q4: An E-GARCH Approach," MPRA Paper 85656, University Library of Munich, Germany.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Adel A. Al-Sharkas & Marwan Al-Zoubi, 2011. "Stock Prices and Inflation: Evidence from Jordan, Saudi Arabia, Kuwait, and Morocco," Working Papers 653, Economic Research Forum, revised 12 Jan 2011.
    2. Sanvicente, A. Z. & Adrangi, B. & Chatrath, A., 2000. "Inflation, output and stock prices: evidence from Brazil," Finance Lab Working Papers flwp_34, Finance Lab, Insper Instituto de Ensino e Pesquisa.
    3. Shu‐Chin Lin, 2009. "Inflation And Real Stock Returns Revisited," Economic Inquiry, Western Economic Association International, vol. 47(4), pages 783-795, October.
    4. Peter Sellin, 2001. "Monetary Policy and the Stock Market: Theory and Empirical Evidence," Journal of Economic Surveys, Wiley Blackwell, vol. 15(4), pages 491-541, September.
    5. Ram Chandra Bhattarai & Nayan Krishna Joshi, 2009. "Dynamic Relationship among the Stock Market and the Macroeconomic Factors," South Asia Economic Journal, Institute of Policy Studies of Sri Lanka, vol. 10(2), pages 451-469, July.
    6. Somayeh Madadpour & Mohsen Asgari, 2019. "The puzzling relationship between stocks return and inflation: a review article," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 66(2), pages 115-145, June.
    7. 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.
    8. Du, Ding, 2006. "Monetary policy, stock returns and inflation," Journal of Economics and Business, Elsevier, vol. 58(1), pages 36-54.
    9. Sellin, Peter, 1998. "Monetary Policy and the Stock Market: Theory and Empirical Evidence," Working Paper Series 72, Sveriges Riksbank (Central Bank of Sweden).
    10. Bampinas, Georgios & Panagiotidis, Theodore, 2016. "Hedging inflation with individual US stocks: A long-run portfolio analysis," The North American Journal of Economics and Finance, Elsevier, vol. 37(C), pages 374-392.
    11. Pierre Siklos & Ben Kwok, 1999. "Stock returns and inflation: a new test of competing hypotheses," Applied Financial Economics, Taylor & Francis Journals, vol. 9(6), pages 567-581.
    12. Harjoat S. Bhamra & Christian Dorion & Alexandre Jeanneret & Michael Weber, 2018. "Low Inflation: High Default Risk AND High Equity Valuations," NBER Working Papers 25317, National Bureau of Economic Research, Inc.
    13. Franses,Philip Hans & Dijk,Dick van & Opschoor,Anne, 2014. "Time Series Models for Business and Economic Forecasting," Cambridge Books, Cambridge University Press, number 9780521520911.
    14. Muradoglu, Yaz Gulnur & Metin, Kivilcim, 1996. "Efficiency of the Turkish Stock Exchange with respect to monetary variables: A cointegration analysis," European Journal of Operational Research, Elsevier, vol. 90(3), pages 566-576, May.
    15. NEIFAR, MALIKA & HarzAllah, AMIRA, 2020. "Can Canadian Stock market provide complete hedge against Inflation ?," MPRA Paper 99093, University Library of Munich, Germany.
    16. Ely, David P. & Robinson, Kenneth J., 1997. "Are stocks a hedge against inflation? International evidence using a long-run approach," Journal of International Money and Finance, Elsevier, vol. 16(1), pages 141-167, February.
    17. repec:asi:ajoerj:2013:p:654-662 is not listed on IDEAS
    18. Alexander Schätz, 2010. "Macroeconomic Effects on Emerging Market Sector Indices," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 9(2), pages 131-169, August.
    19. Samih Antoine Azar, 2013. "The Spurious Relation between Inflation Uncertainty and Stock Returns: Evidence from the U.S," Review of Economics & Finance, Better Advances Press, Canada, vol. 3, pages 99-109, November.
    20. James R. Lothian & Cornelia H.. McCarthy, 2001. "Equity Returns and Inflation: The Puzzlingly Long Lags," International Finance 0107003, University Library of Munich, Germany.
    21. Solnik, Bruno & Solnik, Vincent, 1997. "A multi-country test of the Fisher model for stock returns," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 7(4), pages 289-301, December.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sae:emffin:v:2:y:2003:i:3:p:287-314. 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: . General contact details of provider: http://www.ifmr.ac.in .

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: SAGE Publications (email available below). General contact details of provider: http://www.ifmr.ac.in .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.