Do Stock Returns Hedge against High and Low Inflation? Evidence from Brazilian Companies
Taufiq Choudhry and
Rene Coppe Pimentel
The Review of Finance and Banking, 2010, vol. 02, issue 2, pages 061-076
This paper investigates the relationship between stock returns and inflation using monthly data from ten Brazilian firms and the general Brazilian stock market. The period under investigation, 1986-2008, includes periods of unstable high inflation (1986-1994) and stable low inflation (1994-2008). Standard linear regressions are applied to estimate the relationship after testing first for the stochastic structure of the variables. Results indicate that stock returns do act as a hedge against high inflation but fail to act against low inflation. Variance decomposition tests indicate innovations to the inflation rate affect the movement of the stock returns during the total period and the high inflation period.
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