Extracting Inflation from Stock Returns to test Purchasing Power Parity
We provide a novel method for extracting estimates of realized pure price inflation from stock returns. The key is recognizing that pure price inflation should aÂ®ect nominal returns of all traded assets by exactly the same amount. The popular Fama- French three-factor model is employed to purge stock returns of real economic factors. We uncover evidence that purchasing power parity holds quite well using the extracted inflation measures.
|Date of creation:||20 Jun 2002|
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