Stock prices, inflation and output: Evidence from wavelet analysis

The negative relationship between real stock return and inflation puzzled many as it contradicts conventional Fisherian wisdom. Fama [Fama, E.F. (1981), “Stock returns, real activity, inflation and money”, American Economic Review, 71(September), 545–564.] gave an explanation for this negative relationship with two propositions that links real stock return and inflation through real output. This study revisits Fama's hypothesis for India in the post-liberalized period from a developing country perspective. Examining this relationship on the time-scale decomposition from a wavelet multi-resolution analysis suggests that Fama's hypothesis holds only for the long time scale and remains as a puzzle for the other time scales.     

通货膨胀与农业股票收益多尺度分析

通货膨胀水平与股票收益率的关系是金融学研究的热点问题之一。文章介绍了小波方法的多尺度分析原理,采用农林指数月度收盘价的对数收益率和消费者价格指数分别代表农业股票收益率和通货膨胀率的水平,得到2007年9月到2012年12月农业股票收益率和通货膨胀率的统计特征。以小波方法分解已知的时间序列,得到不同尺度的数值,利用最小二乘法实证两者之间的关系,得到在中尺度和大尺度的分析周期上,两者具有统计意义上显著地正相关关系,支持了费雪效应假说。而在短尺度分析周期上,两者又具有统计意义上的负相关性,出现了费雪效应悖论。     

Asymmetric size-dependent effects of the output gap on inflation: US evidence from the last half a century

This article examines asymmetric size- and sign-dependent effects of the output gap on the US quarterly inflation rate using data from the last half a century (1959Q2–2013Q1). Consistent with previous studies, it is found that the consumer price index is cointegrated with the unit labour cost and the price of oil. A short-run dynamic model is then estimated in which variations in the output gap are divided into three groups: large-positive; large-negative; and small-medium positive/negative. The results provide convincing evidence that only sufficiently large (positive or negative) variations of the output gap can significantly influence inflation. Put otherwise, relatively small to medium changes in the output gap exert no significant impact on inflation and if not separated, they can somewhat obscure the significant effects associated with large variations of the output gap. This study can lead to greater consensus on the inflation–output gap nexus. The findings remain robust despite the use of different measures of output gap and they are consistent with the modern doctrine but with a new caveat: inflation responds to both positive and negative changes in the output gap as long as such variations are of sizable magnitudes.     

The link between inflation and inflation uncertainty: Evidence from G7 countries

In this paper we adopt the Markov-switching heteroscedasticity model to analyse the inflation series for G7 countries and examine the interaction between inflation rate and its uncertainty over both the short- and long-run. It is found that the relationship between inflation and inflation uncertainty depends on whether the shock is permanent or transitory. The relationship also differs from country to country. High uncertainty about long-run inflation is associated with a significant positive shift in inflation for Canada, Germany, and Japan. High uncertainty about short-run inflation is associated with a significant positive shift in inflation for Germany and USA, and a significant negative shift in inflation for Canada. The modelling approach employed in this paper is empirically supported by various diagnostics including the Vuong test. We also derive the two components of the variance of inflation forecast for a particular forecast horizon. It is found that the inflation uncertainty increases at all horizons in the middle of 1970s and return to the low level in the middle of 1980s.First version received: June 2001/Final version received: October 2003We would like to thank three anonymous referees for many helpful comments and suggestions.     

Inflation and Stock Market Returns:Some Australian Evidence*

This paper analyzes the relationship between Australian stock returns and inflation over the period 1965-79. The effects of inflation in a ‘rational investor’ valuation framework are discussed. Empirical tests suggest that nominal stock returns and inflation are related in a significantly negative fashion, implying that stocks have been extremely poor inflationary hedges for the investor over the period. In addition, Granger-Sims tests of causality indicate a mainly unidirectional relationship between inflation and stock returns, with price level charges leading the equity index in time.     

A generalization of modern production theory

This paper analyses the relationship between inflation and equity returns in Australia over the period January 1974 to March 1996. Analysis is based on monthly and quarterly data, using value weighted equity indices at both the aggregate market and industry level. Three price indices, the consumer price index (CPI) (quarterly) and the manufactured materials used index (MMU) and the manufacturing articles produced index (MAP) (both monthly and quarterly) are used to measure inflation. Results provide little evidence of the statistically significant negative relationship observed in the US for the full study period. Analysis is also conducted on three subperiods, ‘monetary targeting’ (July 1976–January 1985), ‘checklist approach’ (February 1985–December 1989) and anti-inflation (January 1990–March 1996). At the market level the anti-inflation subperiod does provide some evidence of a negative relationship between inflation and equity returns though statistical significance is not apparent with quarterly time series. The impact of expected inflation on industry returns varies considerably. Consistent with the overall market analysis, the incidence of negative expected inflation betas increases in the latter anti-inflation subperiod. Finally, changes in Government inflation policy appear to have greatest impact on industrial company expected inflation betas.     

Time-varying relationship of news sentiment,implied volatility and stock returns

I examine the relationship between aggregate news sentiment, S&P 500 index (SPX) returns, and changes in the implied volatility index (VIX). I find a significant negative contemporaneous relationship between changes in VIX and both news sentiment and stock returns. This relationship is asymmetric whereby changes in VIX are larger following negative news and/or stock market declines. Vector autoregression (VAR) analysis of the dynamics and cross-dependencies between variables reveals a strong positive relationship between previous and current period changes in implied volatility and stock returns, while current period and lagged news sentiment has a significant positive (negative) relationship with stock returns (changes in VIX). I develop a simple trading strategy whereby high (low) levels of implied volatility signal attractive opportunities to take short (long) positions in the underlying index, while extremely negative (positive) news sentiment signals opportunities to enter short (long) index positions. The investor fear gauge (VIX) appears to perform better than news sentiment measures in forecasting future returns.     

The time-varying effect of inflation uncertainty on inflation for Turkey

We investigate the effect of inflation uncertainty on inflation from January 1982 through March 2016 for Turkey by using the Stochastic Volatility in Mean model with time-varying parameters. Our empirical evidence from consumer price index (CPI) inflation suggests that the observed positive relationship between inflation and inflation uncertainty is not robust. This positive relationship diminishes after 2002. This finding is valid for all five subcomponents of CPI inflation; however, for Health Services, Transportation Services, and Recreational and Cultural Services, an inflation-positive association is reported after 2010.     

不确定性、通货膨胀与产出增长

基于中国1952—2004年的数据,通过GARCH-M模型和广义脉冲响应函数对不确定性、通货膨胀与产出增长进行实证分析。结果发现:通货膨胀不确定性与产出增长负相关;产出增长不确定性与产出增长负相关;产出增长不确定性与通货膨胀正相关;通货膨胀不确定性与通货膨胀负相关;产出增长冲击和通货膨胀冲击对产出增长不确定性和通货膨胀不确定性的影响存在滞后性和非对称性;产出增长对产出增长冲击的动态响应最大,通货膨胀对产出增长冲击的动态响应以及产出增长对通货膨胀冲击的动态响应最小,通货膨胀对通货膨胀冲击的动态响应居中。     

Stock return predictability: the role of inflation and threshold dynamics

This paper argues that the nature of stock return predictability varies with the level of inflation. We contend that the nature of relations between economic variables and returns differs according to the level of inflation, due to different economic risk implications. An increase in low level inflation may signal improving economic conditions and lower expected returns, while the opposite is true with an equal rise in high level inflation. Linear estimation provides contradictory coefficient values, which we argue arises from mixing coefficient values across regimes. We test for and estimate threshold models with inflation and the term structure as the threshold variable. These models reveal a change in either the sign or magnitude of the parameter values across the regimes such that the relation between stock returns and economic variables is not constant. Measures of in-sample fit and a forecast exercise support the threshold models. They produce a higher adjusted R², lower MAE and RMSE and higher trading related measures. These results help explain the lack of consistent empirical evidence in favour of stock return predictability and should be of interest to those engaged in stock market modelling as well as trading and portfolio management.     

Macroeconomic shocks and stock market returns: the case of Korea

This study examines the effects of macroeconomic shocks on key macro variables, including stock market returns in Korea, using the structural vector autoregression (SVAR) model. We suggest a three-variable SVAR model incorporating inflation, output growth and stock returns. We adopt a nonzero z-ratio restriction for the long-run identifying assumption to allow for economically meaningful relationships among variables. While our results support the negative (positive) relation of demand (supply) shocks to stock returns, we also find that demand shocks influence stock market variance more significantly than supply shocks do. The sub-period analysis finds that global market fluctuations during the global financial crisis have relatively little effect on Korean stock market performance. We also examine a generalized five-variable model that includes the foreign exchange rate and interest rate, confirming the results from the three-variable case.     

Impact of oil prices on firm stock return: industry-wise analysis

The study investigates the impact of oil prices on firm-level stock returns in case of Pakistan over the period 1998–2014, as this relationship is neglected by the previous literature. By using the panel data estimation, the results of full sample indicate significant positive effect of oil price changes on firm stock returns in the same period, whereas the lagged oil price changes have significant negative effect on firms’ stock return. Moreover, the industry-level analysis also confirms the similar findings; results indicate significant positive impact of oil price on firms’ stock return in full sample, textile, chemical and miscellaneous industry, while the lagged oil price changes negatively affect the stock returns of full sample and all the industries except tobacco, jute and vanaspati industries. The study confirms that rise in oil price transfers a positive signal in the stock market that boosts the firm-level stock returns in Pakistan. In contrast to the negative shocks, the stock returns are significantly affected by the positive oil price shocks.     

Threshold Effects on the Relationship Between Inflation Rate and Economic Growth in Tunisia

Using an econometric technique suggested by Hansen [(2001). The new econometrics of structural change: Dating breaks in U.S. Labor productivity. Journal of Economic Perspectives, 15, 117–128], this paper studies the inflation–economic growth nexus in the case of Tunisia for the 1993-01–2012-11 period. The results show that there is one inflation threshold value that does exist for Tunisia. This evidence strongly sustains the view that the relationship between inflation rate and economic growth is non-linear. The estimated threshold regression model suggests that a threshold value of inflation rate below 3.48% fosters economic growth. In addition, above this threshold level, there is a statistically significant negative relationship between inflation rate and economic growth. These results have important implications to policy-makers who should pay attention to the inflation phenomena. Therefore, a new policy that takes into account such a threshold should be set up.     

Trade-threshold Effect on Inflation in Tunisia: New Evidence Resulting from a Nonlinear Approach

Trade openness is an important determinant of the inflation process. The effect of trade openness on inflation, however, is still an issue of debate at both theoretical and empirical levels. This study tried to provide a contribution to the literature by examining the relationship between inflation and trade openness in Tunisia over the period 1975Q1-2015Q4 using a nonlinear model. The originality of this study stems from the fact that it is the first investigation considering both the Residual-Based Tests for Cointegration in Models with the Regime Shifts and Threshold Regression model. The linear model confirms the existence of a positive relationship between inflation and trade in Tunisia. Yet, considering the nonlinear model, trade openness growth and Consumer Price Index (CPI) inflation growth show a statistically significant negative link as long as the trade openness evolution does not exceed the threshold. Nevertheless, if the trade openness growth is higher than the threshold, integrating the trade positively affects CPI inflation. Furthermore, a positive influence of Money supply growth on this type of inflation was noticed in Tunisia in all the considered regimes proving the effect of monetary factors on inflation level. Consequently, trade openness could be used to control inflation in Tunisia.     

ARDL bounds tests and robust inference for the long run relationship between real stock returns and inflation in Australia

This paper conducts an empirical investigation into the long run relationship between real stock returns and inflation in Australia by employing the ARDL bounds tests. There exists a stock return–inflation long run relationship, and the long run parameters are non-linear functions of those of the conditional error correction model. The OLS estimates of the latter model constitute the long run parameter estimates and their standard errors are estimated by delta methods. The long run model estimates so constructed can be biassed and inconsistent, and the delta method is derived assuming asymptotic normality, which does not hold in this investigation. In this paper, to overcome these limitations of the traditional methods, we employ the bias-corrected bootstrap method. As a consequence, the robust and reliable statistical inference can be made on the long run return–inflation relationship. The empirical results show that the expected inflation had no significant effect on real stock returns, while the observed inflation had a significant and negative effect. Furthermore, the data generating process of the returns–inflation relationship was not affected by the change in monetary policy regime in the early 1990s. These findings imply that Australian stocks have been very effective instruments for hedging against expected inflation. Because of the resilience of Australian economy to the current global financial and economic crisis, this finding has implications for long term domestic and foreign investors in Australia.     

On the robustness of alternative rankings methodologies: Australian and New Zealand economics departments, 1988 to 2002

Theoretical considerations appear to support the conjecture that stock returns are positively related to growth in the long run. However, the empirical literature does not give unanimous support to the theory. Based on a stochastic general equilibrium model it is argued that the long-run relationship between stock returns and per capita income growth is ambiguous and depends on output volatility. Using a century of data for 20 Organization for Economic Co-operation and Development (OECD) countries it is shown that the relationship between stock returns and growth is positive over the period 1916–1951, in which output volatility was persistent. Outside this period no relationship between stock returns and growth is found. These findings are consistent with the predictions of the theoretical model.     

Variability of realized stock returns and trading volume

Using monthly data for 2005–2014 time period, this article documents the relationship between lagged stock returns and trading volume. We show that the dispersion of stock returns in a market portfolio positively affects future trading volume. We also show that extreme negative returns lead to high future trading volume while extreme positive returns have little effect on future trading. Dividing our sample into several sub-samples based on the Standard Industrial Classification (SIC) divisions leads to similar results for most of the SIC divisions.     

Stock prices,inflation and inflation uncertainty in the U.S.: testing the long-run relationship considering Dow Jones sector indexes

We test for the long-run relationship between stock prices, inflation and its uncertainty for different U.S. sector stock indexes, over the period 2002M7–2015M10. For this purpose we use a cointegration analysis with one structural break to capture the crisis effect, and we assess the inflation uncertainty based on a time-varying unobserved component model. In line with recent empirical studies we discover that in the long run, the inflation and its uncertainty negatively impact the stock prices, opposed to the well-known Fisher effect. In addition we show that for several sector stock indexes the negative effect of inflation and its uncertainty vanishes after the crisis outburst. However, in the short run the results provide evidence in favour of a negative impact of uncertainty, while the inflation has no significant influence on stock prices, except for the consumption indexes. The consideration of business cycle effects confirms our findings, which proves that the results are robust, both for long- and short-run relationships.