Revisiting the Link Between Stock Prices and Goods Prices in OECD Countries

Abstract

Fisher hypothesis postulates positive relation between stock return and inflation; however early studies document negative relationship between the two and they conclude that stock cannot be used as a hedge against inflation. In this paper we explore long-run nonlinear relationship between stock price and goods price. Our sample consists of 19 OECD countries; all or some of these countries have been studied before with the findings of linear cointegration between the stock index and goods price index. Based on unit root tests and linear cointegration test, we apply threshold cointegration tests, Autoregressive Distributed Lag (ARDL) cointegration test and panel VAR method. With all these econometric methods we arrive at heterogeneous findings as follows: two countries have linear cointegration, five countries have threshold cointegration, nine countries do not have any cointegration and finally two countries provide inconclusive results. Estimates of Fisher coefficient provided by linear and nonlinear cointegration methods, which range between 1.27 and 1.86, are consistent with previous studies. Impulse response analysis from panel VAR for countries having no cointegrating relation shows that shock to inflation produces negative response in stock return, which supports findings of earlier studies.

Stock Market Investment and Inflation: Evidence from the United States and Canada

“…Overall, our estimated value of Fisher coefficient is 1.54 and is not very much different from Anari and Kolari (2001) who report estimates in the range 1.04 to 1.65 for six industrial countries. Our finding here differs from Hassan et al (2015) who found no evidence of cointegration between stock prices and goods prices in the US.…”

“…Alagidede and Panagiotidis (2010) examined the relationship between stock prices and goods prices in six African Countries (South Africa, Nigeria, Kenya, Egypt, Morocco, and Tunisia) using monthly data for different sample periods but also found mixed support for Generalized Fisher Hypothesis (GFH). Hassan, Hoque, and Rao (2015) investigated the relationship between stock prices and goods prices in 19 OECD countries using monthly data using linear and nonlinear cointegration tests, and also found mixed results to support GFH. However, Kim and Ryoo (2011) studied the long-run economic relationship between stock prices and goods prices in the US using monthly data from 1900:01 to 2009:06 within a non-linear cointegration framework, and documented strong evidence that common stocks have been a hedge against inflation from 1950.…”

The relationships between time deposit rates, real rates, inflation and risk premium

“…Γ i is the dimension of m x m and ε t ∼ iid (0, Σ). For cointegration to exist between variables, the rank ( r ) of Π must be greater than zero and less than the number of variables (Hassan et al , 2015). Johansen proposed trace and maximum Eigenvalue test of likelihood ratio techniques to determine the number of cointegration vectors.…”

Relationship between stock returns and inflation: New evidence from the US using wavelet and causality methods

“…Results from the fully modified OLS technique reveal that stock is a hedge against inflation. In the same vein, Hassan et al (2015) examined 19 OECD countries in a panel VAR and FMOLS of Pedroni (2000) approaches using monthly data spanning from 1995 to 2015. They discovered that stock is a hedge against inflation, but the returns must be large enough to compensate for associated investment transaction costs.…”

“…Studies of this relationship are well‐spread across regions and methodological approaches, with single country analyses conducted for Africa (Alagidede, 2009; Alagidede & Panagiotidis, 2010; Arjoon et al, 2012), Asia (Shahbaz, Faridul Islam, & Rehman, 2016; Tiwari et al, 2015; Zhao, 2017), Europe (Aktürk, 2016; Li, Narayan, & Zheng, 2010), the United States (Anari & Kolari, 2001; Bekaert & Engstrom, 2010; Kim & In, 2005; Kim & Ryoo, 2011; Oxman, 2012), South America (Pimentel & Choudhry, 2014) and Australia (Rushdi, Kim, & Silvapulle, 2012). Multi‐country analyses have also been conducted for the OECD (Gregoriou & Kontonikas, 2010; Madsen, 2005;Hassan, Hoque, & Rao, 2015), the G7 (Alagidede & Panagiotidis, 2012) and in emerging economies (Al‐Nassar & Bhatti, 2018; Spyrou, 2004).…”