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Inflation, output and stock prices: evidence from Latin America

Author

Listed:
  • Bahram Adrangi

    (School of Business Administration, The University of Portland, Portland, OR 97203, USA)

  • Arjun Chatrath

    (School of Business Administration, The University of Portland, Portland, OR 97203, USA)

  • Todd M. Shank

    (School of Business Administration, The University of Portland, Portland, OR 97203, USA)

Abstract

Research in economics and finance documents a puzzling negative relationship between stock returns and inflation rate in markets of industrialized economies. The present study investigates this relationship for the developing markets of Peru and Chile. Fama's model of linkages between inflation and real economic activity constitutes the theoretical framework of this paper. The study tests whether the negative relationship between equity returns and inflation is a result of a 'proxy effect', namely, a negative relationship between inflation and real economic activity. The evidence for Peru and Chile does not provide strong support for Fama's hypothesis. It is shown that the negative relationship between the real stock returns and unexpected inflation persists after purging inflation of the effects of the real economic activity. The long-run equilibrium between stock prices and general price levels is weak, as indicated by the findings of the Johansen and Juselius co-integration tests. However, in both economies, stock prices and general price levels seem to show a strong long-run equilibrium with the real economic activity. These findings suggest that in the long-run, Fama's propositions A and B are supported for Peru and Chile. The disparity between traditional regression and co-integration test results suggest that it may be prudent to re-examine the proxy effect in the framework of a long-run relationship before denying its validity. Copyright © 1999 John Wiley & Sons, Ltd.

Suggested Citation

  • Bahram Adrangi & Arjun Chatrath & Todd M. Shank, 1999. "Inflation, output and stock prices: evidence from Latin America," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 20(2), pages 63-74.
    • Handle: RePEc:wly:mgtdec:v:20:y:1999:i:2:p:63-74
    DOI: 10.1002/(SICI)1099-1468(199903)20:2<63::AID-MDE918>3.0.CO;2-U
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    References listed on IDEAS

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    Cited by:

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    2. George Hondroyiannis & Evangelia Papapetrou, 2006. "Stock returns and inflation in Greece: A Markov switching approach," Review of Financial Economics, John Wiley & Sons, vol. 15(1), pages 76-94.
    3. 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.
    4. repec:asi:ajoerj:2013:p:654-662 is not listed on IDEAS
    5. Khan, Muhammad Irfan Khan & Meher, Muhammad Ayub Khan Mehar & Syed, Syed Muhammad Kashif, 2013. "Impact of Inflation on Dividend Policy: Synchronization of Capital Gain and Interest Rate," MPRA Paper 51593, University Library of Munich, Germany, revised 04 Nov 2013.
    6. Salvatore Bruno & Ludwig Chincarini, 2010. "A historical examination of optimal real return portfolios for non‐US investors," Review of Financial Economics, John Wiley & Sons, vol. 19(4), pages 161-178, October.
    7. Bruno, Salvatore & Chincarini, Ludwig, 2010. "A historical examination of optimal real return portfolios for non-US investors," Review of Financial Economics, Elsevier, vol. 19(4), pages 161-178, October.
    8. Josephat Lotto, 2020. "Towards Extending Dividend Puzzle Debate: What Motivates Distribution of Corporate Earnings in Tanzania?," IJFS, MDPI, vol. 8(1), pages 1-14, March.
    9. Theophano Patra & Sunil Poshakwale, 2006. "Economic variables and stock market returns: evidence from the Athens stock exchange," Applied Financial Economics, Taylor & Francis Journals, vol. 16(13), pages 993-1005.

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