The Co-Movement and Long-Run Relationship between Inflation and Stock Returns: Evidence from 12 OECD Countries

Chih-Chuan Yeh () and Ching-Fang Chi
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Chih-Chuan Yeh: Department of Finance, The Overseas Chinese Institute of Technology, Taiwan
Ching-Fang Chi: Department of Banking and Finance, Tamkang University, Taiwan

Journal of Economics and Management, 2009, vol. 5, issue 2, 167-186

Abstract: This paper carries out the methodology suggested by Den Haan (2000) to investigate the co-movement of inflation and real stock returns using quarterly data from OECD countries. We confirm the existence of both short-run and long-run relationships between inflation and real stock returns, regardless of whether the underlying time series data are purely I(0), purely I(1), or mutually co-integrated. Moreover, we use the confidence interval approach introduced by Stock (1991) to further point out the ambiguity in unit root tests. However, our results support the existence of an inverse co-movement and long-run relationship between these two variables in 12 OECD countries. That is, an increase in inflation depresses real stock prices. This evidence is consistent with both the inflation illusion hypothesis and with the classical view that stock returns should be undervalued to reflect the imbalance in the tax treatment of inventory.

Keywords: inflation; stock returns; co-movement; ARDL-ECM (search for similar items in EconPapers)
JEL-codes: C33 G21 O16 (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:jec:journl:v:5:y:2009:i:2:p:167-186

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