Article thumbnail
Location of Repository

Equity Returns and Inflation: The Puzzlingly Long Lags

By James R. Lothian and Cornelia H. McCarthy

Abstract

This paper examines data for stock prices and price levels of 14 developed countries during the post-WWII era and compares their behavior in that sample with behavior over the past two centuries in the UK and the US. Contrary to much of the literature of the past several decades, we find that nominal equity prices do, in fact, keep pace with movements in the overall price level. Our results suggest, however, that this is only the case over long periods. The puzzle therefore is not that equities fail the test as inflation hedges, as had been quite widely believed, but that they take so long to pass.Stock prices, inflation, Fisher effect, neutrality, cointegration.

OAI identifier:

Suggested articles

Citations

  1. (1997). A multi-country test of the Fisher model,"
  2. (1977). Asset Returns and Inflation."
  3. (1987). Co-integration and Error Correction: Representation, Estimation and Testing,"
  4. (1991). Cointegration: How Short is the Long Run?."
  5. (1974). Common Stock Values and Inflation: The Historical Record of Many Countries."
  6. (1995). Do Expected Shifts in Inflation Affect Estimates of the Long-Run Fisher Effect."
  7. (2001). Inflation and Rates of Return on Stocks: Evidence from High Inflation Countries,”
  8. (1980). Inflation and the Stock Market."
  9. (1998). International Financial Relations under the Current Float: Evidence from Panel Data,"
  10. (1993). Is the Fisher Effect for Real?",
  11. (1977). Nobel Lecture: Inflation and Unemployment,”
  12. (1997). Real Exchange Rate Behavior,"
  13. (1987). Stock Market Returns and Inflation: The Role of the Monetary Sector."
  14. (1993). Stock Returns and Inflation: A Long Horizon Perspective."
  15. (1981). Stock Returns, Real Activity, Inflation and Money."
  16. (1985). Testing the Random Walk Hypothesis: Power Versus Frequency of Observation."
  17. (1997). Testing Unit Roots in Heterogeneous Panels, Working Paper,
  18. (1998). The Behavior of Real Exchange Rates During the PostBretton Woods Period,”
  19. (1983). The Fiscal and Monetary Linkage between Stock Returns and Inflation"
  20. (1996). The Long-Horizon Relationship between Nominal Interest Rates and Inflation: The Fisher Effect Revisited."
  21. (1998). The Overvaluation of Purchasing Power Parity,”
  22. (1996). The Recent Float from the Perspective of the Past Two Centuries."
  23. (1930). The Theory of Interest.
  24. (1994). Time Series Analysis.

To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.