Can the Fisher Effect Theory Work in Pakistan?

Khalid Khan (), Chi-Wei Su (), Adnan Khurshid () and Ashfaq U. Rehman
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Khalid Khan: School of Finance, Qilu University of Technology, China
Chi-Wei Su: Department of Finance, Ocean University of China, China
Adnan Khurshid: Abbottabad University of Science and Technology, Abbottabad, Pakistan
Ashfaq U. Rehman: Department of Political Science Women University of Sawabi, Pakistan

Asian Journal of Applied Economics/ Applied Economics Journal, 2018, vol. 25, issue 1, 50-64

Abstract: This paper examines the relationship between the stock market and inflation rate in Pakistan, using the bootstrap Granger full-sample causality test and sub-sample rolling window estimation to test whether the results support the Fisher hypothesis in Pakistan. The empirical result of full sample size shows the unidirectional causality between the stock market and inflation rate. It further shows that in the presence of structural changes, full sample relationship is unstable and unreliable. We use the rolling window estimation considering the timevarying characteristics and conclude bidirectional causality between the inflation rate and stock market in the different sub-sample. The findings are inconsistent with Fisher hypothesis. The conclusion that Inflation rate and the stock market have no positive long-term relationship; the stock market does not offer a hedge against an inflation rate so the policy maker should take measures to balance the tradeoff between the stock market and inflation rate in the short run.

Keywords: Inflation rate; Stock market; rolling window; Bootstrap; Fisher hypothesis (search for similar items in EconPapers)
JEL-codes: C32 E31 H54 (search for similar items in EconPapers)
Date: 2018
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