What is the relation between inflation and stock returns? This paper tries to answer this question. Theworking hypothesis is that inflation is not negatively related to stock returns, as is evidenced empirically for the short run, nor is it positively related to stock returns, as long term analysis seems to suggest, but that simply it is just irrelevant. The paper develops a theoretical model that excludes inflation, and tests the statistical significance of including inflation in the model. The inquiry is generalized to six stock market indices, and to three econometric procedures. Both unconstrained and constrained regressions are carried out. We find strong support for the irrelevance of inflation, especially when the investor is sophisticated. Moreover, we prove and show that the correct null hypothesis in the regression of inflation on real stock returns is that the inflation beta ought to be insignificantly different from -1, and not insignificantly different from zero. Therefore the paper serves to rehabilitate the proposition of inflation irrelevance, in opposition to the conviction of many economists, and despite their resistance.
Author
(s) Details
Dr. Samih Antoine Azar
Faculty of Business Administration and Economics, Haigazian
University, Mexique Street, Kantari, Beirut, Lebanon.
View Book :- https://bp.bookpi.org/index.php/bpi/catalog/book/255
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