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Does inflation matter for equity returns?

Author

Listed:
  • Salman Ahmed
  • Mirko Cardinale

    (European Research & Development, Watson Wyatt LLP, Watson House)

Abstract

The paper explores the relationship between equity returns and inflation using long-term historical data for four of the largest economies in the world: the US, Japan, the UK and Germany. Unlike most previous studies, the paper explores both the long-term and the short-term dimension of the correlation between equity returns and growth in consumer prices. In general, mixed support was found for the hypothesis of a stable long-run equilibrium relationship, while the short-term analysis showed evidence of an asymmetric behaviour during different inflationary regimes, which could not simply be explained in terms of different economic growth environments. For a long-term investor such as a pension fund, the key implication of these results is that short-term dynamics cannot be completely ignored in the belief that the stock market will turn out to be a perfect inflation hedge in the long run.

Suggested Citation

  • Salman Ahmed & Mirko Cardinale, 2005. "Does inflation matter for equity returns?," Journal of Asset Management, Palgrave Macmillan, vol. 6(4), pages 259-273, December.
    • Handle: RePEc:pal:assmgt:v:6:y:2005:i:4:d:10.1057_palgrave.jam.2240180
    DOI: 10.1057/palgrave.jam.2240180
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    Citations

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    Cited by:

    1. Doho, Libaud Rudy Aurelien & Somé, Sobom Matthieu & Banto, Jean Michel, 2023. "Inflation and west African sectoral stock price indices: An asymmetric kernel method analysis," Emerging Markets Review, Elsevier, vol. 54(C).
    2. Arnold, Stephan & Auer, Benjamin R., 2015. "What do scientists know about inflation hedging?," The North American Journal of Economics and Finance, Elsevier, vol. 34(C), pages 187-214.
    3. Salisu, Afees A. & Ndako, Umar B. & Akanni, Lateef O., 2020. "New evidence for the inflation hedging potential of US stock returns," Finance Research Letters, Elsevier, vol. 37(C).
    4. Salisu, Afees A. & Raheem, Ibrahim D. & Ndako, Umar B., 2020. "The inflation hedging properties of gold, stocks and real estate: A comparative analysis," Resources Policy, Elsevier, vol. 66(C).
    5. Mirco Mahlstedt & Rudi Zagst, 2016. "Inflation Protected Investment Strategies," Risks, MDPI, vol. 4(2), pages 1-21, March.
    6. Li, Lifang & Narayan, Paresh Kumar & Zheng, Xinwei, 2010. "An analysis of inflation and stock returns for the UK," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 20(5), pages 519-532, December.
    7. Nassar S. Al-Nassar & Razzaque H. Bhatti, 2019. "Are common stocks a hedge against inflation in emerging markets?," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 43(3), pages 421-455, July.
    8. Somayeh Madadpour & Mohsen Asgari, 2019. "The puzzling relationship between stocks return and inflation: a review article," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 66(2), pages 115-145, June.
    9. Salisu, Afees A. & Ndako, Umar B. & Oloko, Tirimisiyu F., 2019. "Assessing the inflation hedging of gold and palladium in OECD countries," Resources Policy, Elsevier, vol. 62(C), pages 357-377.
    10. Mr. Shaun K. Roache & Alexander P. Attie, 2009. "Inflation Hedging for Long-Term Investors," IMF Working Papers 2009/090, International Monetary Fund.

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