Inflation and Stock Price Behaviour in Selected Asian Economies: An Econometric Snapshot



Abstract: The empirical nexus between stock prices and inflation in an economy has been subjected to the intensive research, predominantly for the developed countries as well as in emerging economies of the world. The objective of this study  is to examine the relationship between inflation and the stock prices and the to assess the impact of inflation on stock prices of  five Asian economies-India,Hongkong,Singapore,Japan and Korea over the period,2002-2010. The result suggests that  in countries like Hongkong and Singapore, long run relationship exists between inflation rate and stock prices but short run causality disappears whereas in case of India and Korea, short run unidirectional granger causality running from inflation to stock prices is  found to exist but long run cointegrating relationship disappears. Results of correlation analysis show that except in case of Korea, correlations between inflation and stock prices are positive in most of the cases under our investigation. Stocks are a perfect hedge to the degree in case of Hongkong,India, Japan, Singapore that corporate cash flows are positively related to inflation following conventional Fisherian  wisdom. But, In case of Korea only, stock prices are negatively related to inflation indicating that stock prices are not good hedge against inflation.




Keywords: Inflation, Stock Prices, causality,PP test, cointegration analysis, Granger Causality Test.

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