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Stock prices, inflation and inflation uncertainty in the U.S.: Testing the long-run relationship considering Dow Jones sector indexes

Author

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  • Claudiu Albulescu

    (UPT - Politehnica University of Timisoara)

  • Christian Aubin

    (CRIEF - Centre de Recherche sur l'Intégration Economique et Financière - Université de Poitiers)

  • Daniel Goyeau

    (CRIEF - Centre de Recherche sur l'Intégration Economique et Financière - Université de Poitiers)

Abstract

We test for the long-run relationship between stock prices, inflation and its uncertainty for different U.S. sector stock indexes, over the period 2002M7 to 2015M10. For this purpose we use a cointegration analysis with one structural break to capture the crisis effect, and we assess the inflation uncertainty based on a time-varying unobserved component model. In line with recent empirical studies we discover that in the long-run, the inflation and its uncertainty negatively impact the stock prices, opposed to the well-known Fisher effect. In addition we show that for several sector stock indexes the negative effect of inflation and its uncertainty vanishes after the crisis setup. However, in the short-run the results provide evidence in the favor of a negative impact of uncertainty, while the inflation has no significant influence on stock prices, except for the consumption indexes. The consideration of business cycle effects confirms our findings, which proves that the results are robust, both for the long-and the short-run relationships.

Suggested Citation

  • Claudiu Albulescu & Christian Aubin & Daniel Goyeau, 2016. "Stock prices, inflation and inflation uncertainty in the U.S.: Testing the long-run relationship considering Dow Jones sector indexes," Working Papers hal-01282481, HAL.
  • Handle: RePEc:hal:wpaper:hal-01282481
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-01282481
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    More about this item

    Keywords

    stock prices; inflation uncertainty; cointegration with structural breaks; unobserved component model; US JEL codes: C22; E31; G15;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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