Skip to main content
SpringerLink
Log in

Stock Prices and Inflation: New Evidence from the Pacific-Basin Countries

  • Published:
Review of Quantitative Finance and Accounting Aims and scope Submit manuscript

Abstract

This paper investigates the statistical relationship between stock prices and inflation in nine countries in the Pacific-Basin. On balance, regression analysis on the nine markets shows negative relationships between stock returns in real terms and inflation in the short run, while co-integration tests on the same markets display a positive relationship between the same variables over the long run. The time path of the response of stock prices plotted against corresponding changes in consumer price indices validates this dichotomy in time-related response patterns of stock prices to inflation; namely, a blip of negative responses at the beginning changes to a positive response over a longer period of time. Stock prices in Asia, like those in the U.S. and Europe, appear to reflect a time-varying memory associated with inflation shocks that make stock portfolios a reasonably good hedge against inflation in the long run.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • Anari, A. and J. Kolari, “Stock Prices and Inflation.” Journal of Financial Research 24, 587–602 (2001).

    Google Scholar 

  • Bodie, Zvi., “Common Stocks as a Hedge Against Inflation.” Journal of Finance 31, 451–470 (1976).

    Google Scholar 

  • Boudoukh, J. and M. Richardson, “Stock Returns and Inflation:A Long-Horizon Perspective.” American Economic Review 83, 1346–1355 (1993).

    Google Scholar 

  • Dickey, D. A. and W. A. Fuller, “Distribution of the Estimators of Autoregressive Time Series with a Unit Root.” Journal of the American Statistical Association 74, 427–431 (1979).

    Google Scholar 

  • Dickey, D. A. and W. A. Fuller, “Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root.” Econometrica 49, 1057–1072 (1981).

    Google Scholar 

  • Engle, R. and W. Granger, “Co-Integration and Error Correction Representation, Estimation, and Testing.” Econometrica 55, 251–276 (1987).

    Google Scholar 

  • Fama, E. F., “Stock Returns, Real Activity, Inflation and Money.” American Economic Review 71, 545–565 (1981).

    Google Scholar 

  • Fama, E. F. and M. R. Gibbons, “Inflation, Real Returns and Capital Investment.” Journal of Monetary Economics 9, 297–323 (1982).

    Google Scholar 

  • Fama, E. F. and W. G. Schwert, “Asset Returns and Inflation.” Journal of Financial Economics 5, 115–146 (1977).

    Google Scholar 

  • Firth, M., “The Relationship Between Stock Market Returns and Rates of Inflation.” Journal of Finance 34, 113–129 (1979).

    Google Scholar 

  • Gallagher, M., “The Inverted Fisher Hypothesis: Additional Evidence.” American Economic Review 76, 247–249 (1986).

    Google Scholar 

  • Geske, R. and R. Roll, “The Fiscal and Monetary Linkage Between Stock Returns and Inflation.” Journal of Finance 38, 1–33 (1983).

    Google Scholar 

  • Granger, C. W., “Cointegrated Variables and Error-Correcting Models.” Discussion Paper, San Diego, CA: University of California, 1983, pp. 83–13a.

    Google Scholar 

  • Granger, C., “Development in the Study of Cointegrated Economic Variables.” Oxford Bulletin of Economics and Statistics 48, 213–228 (1986).

    Google Scholar 

  • Gregory, A.W. and B. E. Hansen, “Residual-Based Test for Cointegration in Model with Regime Shifts.” Journal of Econometrics 70, 99–126 (1996).

    Google Scholar 

  • Gultekin, N., “Stock Market Returns and Inflation: Evidence from Other Countries.” Journal of Finance 38, 49–65 (1983a).

    Google Scholar 

  • Hamilton, J. D., Time Series Analysis. NJ: Princeton University Press, 1994.

    Google Scholar 

  • Hendry, D., “Econometric Modeling with Cointegrated Variables: An Overview.” Oxford Bulletin of Economics and Statistics 48, 51–63 (1986).

    Google Scholar 

  • Hess, P. and Lee, B., “Stock Returns and Inflation with Supply and Demand Disturbances.” Review of Financial Studies 12, 1203–1218 (1999).

    Google Scholar 

  • Hodrick, W. and E. Prescott, “Postwar U.S. Business Cycle: An Empirical Investigation.” Discussion Paper 451, Carnegie-Mellon University, 1980.

  • Jaffe, J. and G. Mandelker, “The Fisher Effect for Risky Assets: An Empirical Investigation.” Journal of Finance 31, 447–458 (1976).

    Google Scholar 

  • James, C., S. Koreisha, and M. Partch, “A VARMA Analysis of Causal Relations Among Stock Returns, Real Output, and Nominal Interest Rates.” Journal of Finance 40, 1375–1384 (1985).

    Google Scholar 

  • Johansen, S., “Statistical Analysis of Cointegration Vectors.” Journal of Economic Dynamics and Control 12, 231–254 (1988).

    Google Scholar 

  • Johansen, S., “Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models.” Econometrica 59, 1551–1580 (1991).

    Google Scholar 

  • Johansen, S., “Likelihood-Based Inference in Cointegration Vector Autoregressive Models.” Oxford University Press 14: 45–66 (1995).

    Google Scholar 

  • Johansen, S. and K. Juselius, “Maximum Likelihood Estimation and Inference on Cointegration with Application to Demand for Money.” Oxford Bulletin of Economics and Statistics 52, 169–210 (1990).

    Google Scholar 

  • Junttila, J., “Testing an Augmented Fisher Hypothesis for Money Market Rate in Finland.” Journal of Macroeconomics 23, 577–599 (2001).

    Google Scholar 

  • Juselius, K., “Long-Run Relations in a Well-Defined Statistical Model for the Data Generating Process: Cointegration Analysis of the PPP and UIP Relations Between Denmark and Germany,” in J. Gruber (Ed.), Economtrica Decision Models: New Methods and Applications, Berlin: Springs Verlag, 1991.

    Google Scholar 

  • Kaul, G., “Stock Returns and Inflation: The Role of the Monetary Sector.” Journal of Financial Economics 18, 253–276 (1987).

    Google Scholar 

  • Kennedy, P., A Guide to Econometrics, 3rd edition. Cambridge, MA: MIT Press, 1992.

    Google Scholar 

  • Khil, J. and B. Lee, “Are Common Stock a Good Hedge Against Inflation? Evidence from the Pacific-Rim Countries.” Pacific-Basin Finance Journal 8, 457–482 (2000).

    Google Scholar 

  • Lee, B. S., “Causal Relations Among Stock Returns, Interest Rates, Real Activity, and Inflation.” Journal of Finance 47, 1591–1603 (1992).

    Google Scholar 

  • Lintner, J., “Inflation and Common Stock Prices in a Cyclical Context.” National Bureau of Economic Research Annual Report, New York, 23–36 (1973).

  • Lintner, J., “Inflation and Security Returns.” Journal of Finance 30, 259–280 (1975).

    Google Scholar 

  • MacKinnon, J. G., “Critical Values for Cointegration Tests,” in R. F. Engle and C.W. J. Granger (Eds.), Long-run Economic Relationships: Readings in cointegration, Oxford University Press, Chapter 13, 1991.

  • Marshall, D., “Inflation and Asset Returns in a Monetary Economy.” Journal of Finance 57, 1315–1342 (1992).

    Google Scholar 

  • Mishkin, F. S., “Is the Fisher Effect for Real? An Examination of the Relationship Between Inflation and Interest Rates.” Journal of Monetary Economics 30, 195–215 (1992).

    Google Scholar 

  • Nelson, C., “Inflation and Rates of Return on Common Stocks.” Journal of Finance 31, 471–483 (1976).

    Google Scholar 

  • Newy, W. and K. West, “A Simple Positive-Definite Heteroscedasticty and Autocorrelation Consistent Covariance Matrix.” Econometrica 55, 703–708 (1987).

    Google Scholar 

  • Nichols, D., “Discussion.” Journal of Finance 31, 483–487 (1976).

    Google Scholar 

  • Osterwald-Lenum, M., “A Note with Quintiles of the Asympototic Distribution of the Maximum Likelihood Cointegration Rank Test Statistics.” Oxford Bulletin of Economics and Statistics 54, 761–471 (1992).

    Google Scholar 

  • Perron, P., “Trend and Random Walks in Macroeconomic Time Series: Further Evidence from a New Approach.” Journal of Economic Dynamics and Control 12, 297–332 (1988).

    Google Scholar 

  • Perron, P., “Further Evidence on Breaking Trend Functions in Macroeconomic Variables.” Journal of Econometrics 80, 355–385 (1997).

    Google Scholar 

  • Phillips, P. and Perron, P., “Testing for a Unit Root in Time Series Regression.” Biometrika 75, 335–346 (1990).

    Google Scholar 

  • Pierse, R. G. and A. J. Snell, “Temporal Aggregation and the Power of Tests for a Unit Root.” Journal of Econometrics 65, 333–345 (1995).

    Google Scholar 

  • Pyun, C. S., S. Y. Lee, and K. Nam, “Volatility and Information Flows in Emerging Equity Market: A Case of the Korean Stock Exchange.” International Review of Financial Analysis 9, 405–420 (2000).

    Google Scholar 

  • Rappoport, P. and L. Reichlin, “Segmented Trends and Non-Stationary Time Series.” Economic Journal 99, 168–177 (1989).

    Google Scholar 

  • Rousseau, P. L. and Wachtel P., “Equity Markets and Growth: Cross-Country Evidence on Time and Outcomes, 1980–1995.” Journal of Banking and Finance 24, 1933–1957 (2000).

    Google Scholar 

  • Schmidt, P., “Dickey-Fuller Tests with Drift,” in T. B. Fomby, and G. F. Rhodes, Jr. (Eds.), Cointegration, Spurious Regressions and Unit Roots, London: JAI Press, 1990, pp. 161–200.

    Google Scholar 

  • Solnik, B., “The Relation Between Stock Prices and Inflationary Expectations: The International Evidence.” Journal of Finance 38, 35–48 (1983).

    Google Scholar 

  • Shrestha, K., S. S. Chen, and C. F. Lee, “Are Expected Inflation Rates and Expected Real Rate Negatively Correlated? A Long-Run Test of the Mundell-Tobin Hypothesis.” Journal of Financial Research 25, 305–320 (2002).

    Google Scholar 

  • Stock, J., Asymptotic Properties of Least Squares Estimates of Cointegrating Vectors. Mimeo, Harvard University.

Download references

Author information

Authors and Affiliations

  1. School of Business and Management, American University of Sharjah, P.O. Box 26666, Sharjah, U.A.E. Tel.:

    Osamah M. Al-Khazali

  2. Department of Finance, University of Memphis, Memphis, TN, 38152, USA Tel.:

    Chong Soo Pyun

Authors
  1. Osamah M. Al-Khazali
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Chong Soo Pyun
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Osamah M. Al-Khazali.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Al-Khazali, O.M., Pyun, C.S. Stock Prices and Inflation: New Evidence from the Pacific-Basin Countries. Review of Quantitative Finance and Accounting 22, 123–140 (2004). https://doi.org/10.1023/B:REQU.0000015853.16564.e3

Download citation

  • Issue Date:

  • DOI: https://doi.org/10.1023/B:REQU.0000015853.16564.e3

Search

Navigation