Empirical Analysis of Effects of Expected Inflation on Stock Returns

Authors

  • Farwa Abbas PIDE Islamabad, Pakistan
  • Ahsan Ul Haq Satti Pakistan Institute of Development Economics (PIDE), Islamabad, Pakistan

Keywords:

Expected Inflation, Stock Returns, FAMA Money Demand Model, ARMA Model

Abstract

We adopted asymmetric test specification model to investigate implications of expected inflation on stock returns. While to calculate expected inflation, two methods, Fama money demand model (1981) and ARMA model were employed. Monthly data is obtained covering data span of August 1998 to June 2018 from concerned sources. The results show a strong relationship between real stock returns (adjusted from inflation) and expected inflation while utmost an insignificant relationship between nominal stock returns and predicted inflation. An inverse relationship amidst stock returns and inflation is observed during only low inflation time period in contrast to high inflation time period (positive relationship). The impact of expected inflation on stock returns by dividing the sample period into sub periods provides insignificant relationship between stock returns and expected inflation which is obvious as stock returns behaves noisy in short time period.

Author Biography

Farwa Abbas, PIDE Islamabad, Pakistan

Pakistan Institute of Development Economics (PIDE), Islamabad, Pakistan

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Published

2019-06-30

How to Cite

Abbas, F., & Satti, A. U. H. (2019). Empirical Analysis of Effects of Expected Inflation on Stock Returns. Pakistan Journal of Economic Studies (PJES), 2(1), 71–98. Retrieved from https://journals.iub.edu.pk/index.php/pjes/article/view/17