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Can the Fisher Effect Theory Work in Pakistan?

Author

Listed:
  • Khan, Khalid

    (School of Finance, Qilu University of Technology, China)

  • SU, Chi-Wei

    (Department of Finance, Ocean University of China, China)

  • Khurshid, Adnan

    (Abbottabad University of Science and Technology, Abbottabad, Pakistan)

  • Rehman, Ashfaq U.

    (Department of Political Science Women University of Sawabi, Pakistan)

Abstract

This paper examines the relationship between the stock market and inflation rate in Pakistan, using the bootstrap Granger full-sample causality test and sub-sample rolling window estimation to test whether the results support the Fisher hypothesis in Pakistan. The empirical result of full sample size shows the unidirectional causality between the stock market and inflation rate. It further shows that in the presence of structural changes, full sample relationship is unstable and unreliable. We use the rolling window estimation considering the timevarying characteristics and conclude bidirectional causality between the inflation rate and stock market in the different sub-sample. The findings are inconsistent with Fisher hypothesis. The conclusion that Inflation rate and the stock market have no positive long-term relationship; the stock market does not offer a hedge against an inflation rate so the policy maker should take measures to balance the tradeoff between the stock market and inflation rate in the short run.

Suggested Citation

  • Khan, Khalid & SU, Chi-Wei & Khurshid, Adnan & Rehman, Ashfaq U., 2018. "Can the Fisher Effect Theory Work in Pakistan?," Asian Journal of Applied Economics/ Applied Economics Journal, Kasetsart University, Faculty of Economics, Center for Applied Economic Research, vol. 25(1), pages 50-64, June.
    • Handle: RePEc:ris:apecjn:0019
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    More about this item

    Keywords

    Inflation rate; Stock market; rolling window; Bootstrap; Fisher hypothesis;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures

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