Pitfalls in Estimates of Relationship between Share Returns and Inflation

Jakob Madsen

No 2004/07, FRU Working Papers from University of Copenhagen. Department of Economics. Finance Research Unit

Abstract: Empirical tests of the Fisher hypothesis give conflicting results, regardless of whether income growth is accommodated in the estimates. This paper shows theoretically and empirically that standard methods of testing the Fisher hypothesis give biased results and that the bias depends on the specification of the Fisher equation, the process governing inflation, measurement of inflation expectations, and the time aggregation of the data. Alternative tests show that share markets take several years to adjust to innovations in inflation and therefore that the Fisher hypothesis cannot be maintained.

Keywords: Fisher hypothesis; share returns; inflation persistence (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Pages: 16 pages
Date: 2004-10
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