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Extracting Inflation from Stock Returns to test Purchasing Power Parity

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  • Chowdhry, Bhagwan
  • Roll, Richard
  • Xia, Yihong

Abstract

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 a®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.

Suggested Citation

  • Chowdhry, Bhagwan & Roll, Richard & Xia, Yihong, 2002. "Extracting Inflation from Stock Returns to test Purchasing Power Parity," University of California at Los Angeles, Anderson Graduate School of Management qt0sx3x482, Anderson Graduate School of Management, UCLA.
    • Handle: RePEc:cdl:anderf:qt0sx3x482
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    Cited by:

    1. Harald Hau & Hélène Rey, 2006. "Exchange Rates, Equity Prices, and Capital Flows," The Review of Financial Studies, Society for Financial Studies, vol. 19(1), pages 273-317.

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