Consideration the Relationship between the Inflation and Stock Price with Panel Cointegration Approach

Abstract

The analytical literature mentions the possibility of a negative and a positive relationship both. The purpose of this study is to examine the relationship between the inflation and stock prices in Asian selected countries for 2000 – 2012 by using quarterly data. In Economics literature many studies tried to examine whether stocks are perfect hedge against inflation. The answer is not conclusive. In this paper, using data from Asian selected countries stock market, the relationship between inflation and stock returns. The long-run relationship is estimated using a full-modified OLS. Pedroni's heterogeneous panel cointegration test reveals a long-run equilibrium relationship between inflation and stock price. The empirical results have shown that Fisher Hypothesis, which asserts that stocks are perfect hedge against inflation, has been rejected and also it is revealed that stocks are a weak hedge against inflation in Asian selected stock market. However in the very long run as we observe from the co-integrating equation, inflation influences stock prices and that too in a positive direction. Also Results obtained indicate the presence of the long run and the short run relationship between inflation and stock price. In the short run and in the long run, inflation is found to be Granger cause of economic stock price, and vice versa.

Keywords: inflation, stocks, money volume, panel cointegration.