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Empirical Analysis of Effects of Expected Inflation on Stock Returns

Author

Listed:
  • Farwa Abbas
  • Ahsan Ul Haq Satti

    (Pakistan Institute of Development Economics (PIDE), Islamabad, Pakistan.)

Abstract

In this paper, we adopted asymmetric test specification model to investigate implications of expected inflation on stock returns in Pakistan. While to calculate expected inflation, two methods, Fama money demand model (1981) and ARMA model were employed on monthly data covering time span from August 1998 to June 2018. The results show a strong relationship between real stockreturns (adjusted frominflation) and expected inflation while utmost an insignificant relationship between nominal stock returns and predicted inflation. An inverse relationship amidst stock returns and inflation is observed during only low inflation time period in contrast tohigh inflation time period (positive relationship). The impact of expected inflation on stock returns by dividing the sample period into sub periods provides insignificant relationship between stock returns and expected inflation which is obvious as stockreturns behaves noisy in short time period.

Suggested Citation

  • Farwa Abbas & Ahsan Ul Haq Satti, 2019. "Empirical Analysis of Effects of Expected Inflation on Stock Returns," Pakistan Journal of Economic Studies, Department of Economics, The Islamia University of Bahawalpur, Pakistan., vol. 2(1), pages 71-98, June.
    • Handle: RePEc:akw:iupjes:v:2:y:2019:i:1:p:71-98
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    File URL: https://journals.iub.edu.pk/index.php/pjes/article/view/17/39
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    File URL: https://journals.iub.edu.pk/index.php/pjes/article/view/17
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    More about this item

    Keywords

    Expected Inflation; Stock Returns; Fama Money Demand Model; ARMA;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • R53 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Public Facility Location Analysis; Public Investment and Capital Stock

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