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Pitfalls in Estimates of Relationship between Share Returns and Inflation

Author

Listed:
  • Jakob B. Madsen

    (Institute of Economics, University of Copenhagen)

Abstract

Empirical tests of the Fisher hypothesis give conflicting results, regardless of whether income growth is accommodated in the estimates. This paper shows theoretically and empirically that standard methods of testing the Fisher hypothesis give biased results and that the bias depends on the specification of the Fisher equation, the process governing inflation, measurement of inflation expectations, and the time aggregation of the data. Alternative tests show that share markets take several years to adjust to innovations in inflation and therefore that the Fisher hypothesis cannot be maintained.

Suggested Citation

  • Jakob B. Madsen, 2004. "Pitfalls in Estimates of Relationship between Share Returns and Inflation," FRU Working Papers 2004/07, University of Copenhagen. Department of Economics. Finance Research Unit.
    • Handle: RePEc:kud:kuiefr:200407
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    File URL: http://www.econ.ku.dk/FRU/WorkingPapers/PDF/2004/2004_07.pdf
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    More about this item

    Keywords

    Fisher hypothesis; share returns; inflation persistence;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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