Common stock returns,real activity,money, and inflation: Some international evidence |
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Authors: | Gershon Mandelker Kishore Tandon |
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Institution: | Graduate School of Business, University of Pittsburgh, Pittsburgh, PA 15260, USA;Department of Finance, Baruch College (CUNY), New York, NY 10010, USA |
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Abstract: | This paper tests whether the negative relationship between real stock returns and inflation in the United States is in fact proxying for a positive relationship between stock returns and real activity variables in six major industrial countries over 1966–1979. Consistent with Fama's ‘proxy-effect’ hypothesis, we document a negative relationship between inflation and real activity and a positive one between real stock returns and real activity variables. Real activity variables dominate money growth rates and expected and unexpected inflation in explaining real stock returns. A puzzling result that still remains is the positive role of money and the negative role of expected inflation in explaining these real stock returns in all major industrial countries. |
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