The stock return–inflation puzzle revisited

Gallagher, Liam A.; Taylor, Mark P.

doi:10.1016/s0165-1765(01)00613-9

Cited by 78 publications

(39 citation statements)

References 13 publications

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“…Our findings coincide with those from studies by Rapach (2002), Kim (2003) and Al-Khazali and Pyun (2004), Alagidede and Panagiotidis (2010) and Wei (2010). However we do not find considerable evidence in support of an inverse relationship between inflation and real stock prices as suggested by Modigliani and Cohn (1979), Feldstein (1980), Fama (1981, Devereux and Yetman (2002), Gallagher and Taylor (2002) and Anari and Kolari (2010).…”

Section: Resultssupporting

confidence: 87%

“…This hypothesis was tested and extended to include the effects of monetization of government deficits by Geske & Roll (1983). To formalize and derive testable implications of this hypothesis Gallagher and Taylor (2002) develop a theoretical model which decomposes inflation into a component due to supply shocks and a component due to demand shocks. They show stock prices to be significantly and negatively correlated with inflation via supply shocks (rather than demand shocks).…”

Section: Introductionmentioning

confidence: 99%

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The Long-Run Relationship Between Inflation and Real Stock Prices: Empirical Evidence From South Africa

Arjoon

Botes

Chesang

et al. 2012

Journal of Business Economics and Management

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The existing literature on the theoretical relationship between the rate of inflation and real stock prices in an economy has shown varied predictions about the long run effects of inflation on real stock prices. In this paper, we present some time series evidence on this issue using South African data, by applying the structural bivariate vector autoregressive (VAR) methodology proposed by King and Watson (1997). Our empirical results provide considerable support of the view that, in the long run real stock prices are invariant to permanent changes in the rate of inflation. The impulse responses reveal a positive real stock price response to a permanent inflation shock in the long run, indicating that any deviations in short run real stock prices will be corrected towards the long run value. It is therefore concluded that inflation does not lower the real value of stocks in South Africa, at least in the long run.

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Section: Resultssupporting

confidence: 87%

Section: Introductionmentioning

confidence: 99%

The Long-Run Relationship Between Inflation and Real Stock Prices: Empirical Evidence From South Africa

Arjoon

Botes

Chesang

et al. 2012

Journal of Business Economics and Management

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show abstract

“…Fama and Schwert [26], Schwert [27], Fama [28], Quayes and Jamal [29], Gallagher and Taylor [30,31], Rapach [32], and Feldstein [33] have shown that inflation can have a negative impact on stock prices in industrialized countries, but Al-Khazali and Pyun [34] and Spyrou [35] showed that such a negative relationship may not hold true for emerging economies. However, some studies from Pearce and Roley [36] and Hardouvelis [37] found no significant relationship between the two variables.…”

Section: Literature Reviewmentioning

confidence: 99%

Fiscal Deficits and Stock Prices in India: Empirical Evidence

Joshi

Giri

2015

IJFS

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Abstract:The study aims at examining how fiscal deficits affect the performance of the stock market in India by using annual data from 1988-2012. The study makes use of Ng-Perron unit root tests to check the non-stationarity property of the series; the Auto Regressive Distributed Lag (ARDL) bounds test and a Vector Error Correction Model (VECM) for testing both short and long run dynamic relationships. The variance decomposition (VDC) is used to predict the exogenous shocks of the variables. The findings of the bounds test reveal that the estimated equation and the series are co-integrated. The ARDL results suggest a long run negative relationship exists between budget deficit and stock prices and do not show any significant relationship in the short run. The VECM result shows that fiscal deficits influence the stock price only in the short run. The results of the Variance Decomposition show that stock price movement in the long run is mostly explained by shocks of fiscal deficits. The study implies that the government must adopt appropriate macroeconomic policies to reduce budget deficit, which will result in stock market growth and in turn will lead to the financial development of the country.

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“…In Gallagher (1999) the Blanchard and Quah procedure is applied to a VAR in two variables (stock prices and inflation) to identify temporary and permanent components in stock prices for 16 European countries while in Taylor and Gallagher (2000) a similar technique is applied to US data, using nominal interest rates as the second identifying variable in the place of inflation and applying estimation techniques which are robust to the usual departures from iidnormality common in financial data. In Gallagher and Taylor (2002a) the focus is, like Hess and Lee (1999), on the stock-price-inflation puzzle which is analysed in a model containing only these two variables. In Gallagher and Taylor (2002b) the model is again a two-variable VAR in inflation and stock returns which is used to decompose stock prices into temporary and permanent parts using the Blanchard and Quah procedure.…”

mentioning

confidence: 99%