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Equity Returns and Inflation: The Puzzlingly Long Lags

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Listed:
  • James R. Lothian

    (Fordham University,)

  • Cornelia H.. McCarthy

    (Fordham University)

Abstract

This paper examines data for stock prices and price levels of 14 developed countries during the post-WWII era and compares their behavior in that sample with behavior over the past two centuries in the UK and the US. Contrary to much of the literature of the past several decades, we find that nominal equity prices do, in fact, keep pace with movements in the overall price level. Our results suggest, however, that this is only the case over long periods. The puzzle therefore is not that equities fail the test as inflation hedges, as had been quite widely believed, but that they take so long to pass.

Suggested Citation

  • James R. Lothian & Cornelia H.. McCarthy, 2001. "Equity Returns and Inflation: The Puzzlingly Long Lags," International Finance 0107003, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpif:0107003
    Note: Type of Document - Acrobat PDF; prepared on PC; to print on HP Deskjet 950C; pages: 25; figures: included . This draft May 2001; first draft December 1997
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    Cited by:

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    2. Tiwari Aviral Kumar & Cunado Juncal & Gupta Rangan & Wohar Mark E., 2019. "Are stock returns an inflation hedge for the UK? Evidence from a wavelet analysis using over three centuries of data," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 23(3), pages 1-17, June.
    3. Mirco Mahlstedt & Rudi Zagst, 2016. "Inflation Protected Investment Strategies," Risks, MDPI, vol. 4(2), pages 1-21, March.
    4. 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.
    5. Mr. Shaun K. Roache & Alexander P. Attie, 2009. "Inflation Hedging for Long-Term Investors," IMF Working Papers 2009/090, International Monetary Fund.
    6. 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.
    7. 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).
    8. NEIFAR, MALIKA & HACHICHA, Fatma, 2022. "GFH validity for Canada, UK, and Suisse stock markets: Evidence ‎from univariate and panel ARDL models," MPRA Paper 114613, University Library of Munich, Germany.

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    More about this item

    Keywords

    Stock prices; inflation; Fisher effect; neutrality; cointegration; Equity Returns; Inflation ; Long Lags;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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