Hasan, Mohammad S (2008) Stock returns, inflation and interest rates in the United Kingdom. European Journal of Finance, 14 (8). pp. 687-699. ISSN 1351-847X .
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The Fisherian theory of interest asserts that a fully perceived change in inflation would be reflected in nominal interest rates and stock returns in the same direction in the long run. This paper examines the Fisherian hypothesis of asset returns using alternative techniques of linear regression, and vector error correction models to examine the nature of the relationship between stock returns and inflation in the UK. Consistent with the Fisherian hypothesis, empirical evidence in the linear regression model suggests a positive and statistically significant relationship between stock returns and inflation, which regards common stock as a good hedge against inflation. The results based on the unit root and cointegration tests indicate a long-run reliable relationship between price levels, share prices, and interest rates which could be interpreted as the long-run determinants of stock returns. The findings also suggest a bidirectional relationship between stock returns and inflation. The evidence of a significant Fisher effect is robust across model specifications.
|Uncontrolled keywords:||inflation; stock returns; Fisher effect; cointegration|
|Subjects:||H Social Sciences|
|Divisions:||Faculties > Social Sciences > Kent Business School > Accounting and Finance|
|Depositing User:||Rebecca Stevenson|
|Date Deposited:||06 Jan 2010 10:47|
|Last Modified:||29 Jan 2010 13:44|
|Resource URI:||http://kar.kent.ac.uk/id/eprint/23563 (The current URI for this page, for reference purposes)|
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