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Equity Returns and Inflation: The Puzzlingly Long Lags

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Listed:
  • James R. Lothian

    (Fordham University)

  • Cornelia H. McCarthy

    (Fordham University)

Abstract

This paper examines data for stock prices and price levels of 14 developed countries during the post-WWII era and compares their behavior in that sample with behavior over the past two centuries in the UK and the US. Contrary to much of the literature of the past several decades, we find that nominal equity prices do, in fact, keep pace with movements in the overall price level. Our results suggest, however, that this is only the case over long periods. The puzzle therefore is not that equities fail the test as inflation hedges, as had been quite widely believed, but that they take so long to pass.

Suggested Citation

  • James R. Lothian & Cornelia H. McCarthy, 2003. "Equity Returns and Inflation: The Puzzlingly Long Lags," International Finance 0311007, EconWPA.
  • Handle: RePEc:wpa:wuwpif:0311007
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    References listed on IDEAS

    as
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    Cited by:

    1. Arnold, Stephan & Auer, Benjamin R., 2015. "What do scientists know about inflation hedging?," The North American Journal of Economics and Finance, Elsevier, vol. 34(C), pages 187-214.
    2. 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.
    3. Mirco Mahlstedt & Rudi Zagst, 2016. "Inflation Protected Investment Strategies," Risks, MDPI, Open Access Journal, vol. 4(2), pages 1-21, March.
    4. Shaun K. Roache & Alexander P. Attie, 2009. "Inflation Hedging for Long-Term Investors," IMF Working Papers 09/90, International Monetary Fund.
    5. repec:gam:jrisks:v:4:y:2016:i:2:p:9:d:66628 is not listed on IDEAS
    6. Aviral Kumar Tiwari & Juncal Cunado & Rangan Gupta & Mark E. Wohar, 2017. "Are Stock Returns an Inflation Hedge for the UK? Evidence from a Wavelet Analysis Using Over Three Centuries of Data," Working Papers 201735, University of Pretoria, Department of Economics.

    More about this item

    Keywords

    Stock prices; inflation; Fisher effect; neutrality; cointegration.;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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