Canada: The Inflation Irrelevance Proposition

Samih Antoine Azar
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Samih Antoine Azar: Full Professor, Faculty of Business Administration & Economics, Haigazian University, Mexique Street, Kantari, Beirut, Lebanon

International Journal of Economics and Financial Research, 2022, vol. 8, issue 4, 104-111

Abstract: The underlying thesis is that inflation does not impact in a significant way stock returns. A stronger thesis is that both domestic and foreign inflation rates are neutral to stock returns. This joint hypothesis is tested for Canada, using 5 theoretical models that describe the determinants of Canadian stock returns. These models range from the most stripped one to the least constrained. All 5 models produce evidence of the strong inflation irrelevance hypothesis for the two key variables, Canadian and foreign (US) inflation rates. Naturally, the largest theoretical model is to be selected for inference purposes. This model includes 12 explanatory variables: 2 inflation rates, 2 proxies for earnings, 2 local duration effects, 2 foreign (US) duration effects, the Canadian/US dollar foreign exchange rate, the price of oil, and two categorical variables that pick up the effect of foreign (US) stock markets. The results show that the model provides sign and size effects in conformity with expectations from the theoretical macroeconomic interrelationships. Hence, the paper, besides documenting inflation neutrality, models in a meaningful manner the determinants of the stock market. All in all the empirical results are largely supportive.

Keywords: Stock returns; Inflation neutrality; Determinants of stocks; Multiple regression analysis; Calendar breakpoints; Canada and the US (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:arp:ijefrr:2022:p:104-111

DOI: 10.32861/ijefr.84.104.111

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