Journal of Asset Management

, Volume 6, Issue 4, pp 259–273 | Cite as

Does inflation matter for equity returns?

  • Salman Ahmed
  • Mirko Cardinale


The paper explores the relationship between equity returns and inflation using long-term historical data for four of the largest economies in the world: the US, Japan, the UK and Germany. Unlike most previous studies, the paper explores both the long-term and the short-term dimension of the correlation between equity returns and growth in consumer prices. In general, mixed support was found for the hypothesis of a stable long-run equilibrium relationship, while the short-term analysis showed evidence of an asymmetric behaviour during different inflationary regimes, which could not simply be explained in terms of different economic growth environments. For a long-term investor such as a pension fund, the key implication of these results is that short-term dynamics cannot be completely ignored in the belief that the stock market will turn out to be a perfect inflation hedge in the long run.


equity inflation GDP causality vector autoregression 


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Copyright information

© Palgrave Macmillan 2005

Authors and Affiliations

  • Salman Ahmed
  • Mirko Cardinale
    • 1
  1. 1.European Research & Development, Watson Wyatt LLP, Watson HouseReigateUK

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