STOCKS HEDGE AGAINST INFLATION IN THE LONG RUN: EVIDENCE FROM A COIN- TEGRATION ANALYSIS FOR DENMARK

Jan Overgaard Olesen
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Jan Overgaard Olesen: Department of Economics, Copenhagen Business School, Postal: Department of Economics, Copenhagen Business School, Solbjerg Plads 3 C, 5. sal, DK-2000 Frederiksberg, Denmark

No 06-2000, Working Papers from Copenhagen Business School, Department of Economics

Abstract: We suggest an alternative approach to testing whether stocks provide a hedge against

inflation in the long run. Based on a simple structural model, we test the hedge hypothesis in

terms of the long-run linkage between stock prices and the general price level, as estimated

by cointegration analysis. Using data for the Danish stock market over the post-World War

II-period, results give strong support for the hedge property, defined in the narrow sense of

a perfect hedge. This contrasts with the weak support found in the literature and also

represents stronger support than produced by standard methods. We argue that our

approach has the advantage of allowing for a clear distinction between short- and long-run

dynamics of stock prices which adjust slowly to long-run equilibrium.

Keywords: Stocks; Hedge; Inflation; Denmark; Stock prices (search for similar items in EconPapers)
JEL-codes: G11 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2000-03-01
New Economics Papers: this item is included in nep-fmk
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Citations: View citations in EconPapers (2)

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