Stock Returns, Inflation, and the 'Proxy Hypothesis:' A New Look at the Data
|Keywords:||vector autoregression;vector moving average;covariance decomposition|
|Abstract:||This paper reexamines the proxy hypothesis of Fama (American Economic Review, 1981, 71, 545-565) as the main explanation for the negative correlation between stock returns and inflation. We look at quarterly data on industrial-production growth, monetary-base growth, CPI inflation, three-month Treasury-bill rates, and returns on the equally-weighted NYSE portfolio, for the 1954-1976 and 1977-1990 periods. Using time-series techniques, we find that production growth induces only a weak negative correlation between inflation and stock returns, and explains less of the covariance between the two series than inflation and interest-rate innovations.|
|Appears in Collections:||Finance Working Papers|
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