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Stock Returns-Inflation Relation In India

Author

Listed:
  • K.R. Shanmugam

    (Madras School of Economics)

  • Biswa Swarup Misra

    (Xavier Institute of Management, Bhubaneswar, Orissa)

Abstract

This study contributes to the stock returns-inflation relation literature in developing countries by revisiting the issue with reference to the emerging economy, India. More specifically, it tests whether the Indian stock market provides an effective hedge against inflation using monthly data on real stock return, inflation and real activity from April 1980 to March 2004 and a two-step estimation procedure. Results of the study indicate that (i) the Indian stock market reflects future real activity; (ii) the negative stock returns-inflation relation emerges from the unexpected component of the inflation and (iii) this negative relation vanishes when we control for the inflation-real activity relation, thereby providing a strong support for Fama’s proxy effect hypothesis. The split sample analyses indicate that the Fama hypothesis is valid only in pre reform period. In the post reform period, real stock returns have been independent of inflation, i.e., the Fisher Hypothesis is valid.

Suggested Citation

  • K.R. Shanmugam & Biswa Swarup Misra, 2008. "Stock Returns-Inflation Relation In India," Working Papers 2008-038, Madras School of Economics,Chennai,India.
    • Handle: RePEc:mad:wpaper:2008-038
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    References listed on IDEAS

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    Cited by:

    1. Avishek Bhandari & Kamaiah Bandi, 2018. "On the Dynamics of Inflation-Stock Returns in India," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 16(1), pages 89-99, March.
    2. Muhammad Shahbaz & Faridul Islam & Ijaz Ur Rehman, 2016. "Stocks as Hedge against Inflation in Pakistan: Evidence from ARDL Approach," Global Business Review, International Management Institute, vol. 17(6), pages 1280-1295, December.
    3. Rangan GUPTA & Roula INGLESI-LOTZ, 2012. "Macro Shocks and Real US Stock Prices with Special Focus on the “Great Recession”," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 12(2).

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    More about this item

    Keywords

    Stock Return; Inflation; Fama’s proxy effect hypothesis;
    All these keywords.

    JEL classification:

    • E - Macroeconomics and Monetary Economics

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