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Can Common Stocks Provide Hedge against Inflation? Evidence from SAARC Countries

Author

Listed:
  • Syed Zulfiqar Ali Shah

    (International Islamic University, Islamabad)

  • Zafar Moeen Nasir

    (Pakistan Institute of Development Economics, Islamabad)

  • Muhammad Naeem

    (International Islamic University, Islamabad.)

Abstract

Economists and financial analysts have always wondered whether or not investment in common stocks can provide hedge against inflation. In this paper we empirically tested this relationship between stock returns and inflation rate to assess the extent, if any, to which investment in common stocks provides a hedge against inflation in SAARC countries. Monthly data was used from period 1993 to 2011, employing ADF and PP test for unit root testing. By applying the ARDL bound testing approach we found that all countries included in the sample show a long run relationship between stock returns and inflation. We also applied ECM test which is significant in our result. It was also tested whether the relationship that exists between the two is a long term relationship or merely short term one. The findings were somewhat mixed

Suggested Citation

  • Syed Zulfiqar Ali Shah & Zafar Moeen Nasir & Muhammad Naeem, 2012. "Can Common Stocks Provide Hedge against Inflation? Evidence from SAARC Countries," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 51(4), pages 435-448.
    • Handle: RePEc:pid:journl:v:51:y:2012:i:4:p:435-448
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    Keywords

    Stock Return; Inflation;

    JEL classification:

    • C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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