Český finanční a účetní časopis 2011(2):37-57 | DOI: 10.18267/j.cfuc.104

The Analysis of the Relationship between Stock Returns and Inflation: A Consequence of Real Shocks or Money Illusion?

David Havlíček
Ing. David Havlíček - interní doktorand; Katedra bankovnictví a pojišťovnictví, Fakulta financí a účetnictví, Vysoká škola ekonomická v Praze, nám. W. Churchilla 4, 130 67 Praha 3; <xhavd09@vse.cz>.

The study analyzes the negative relationship between stock market returns and inflation. This finding is contrary to the standard view of the stock as an instrument for hedging of property against rising prices. The paper aims to summarize the main theoretical explanations for this relationship and replicates with the empirical data from the United States and the Czech Republic earlier study explaining the relationship with a string of fiscal and monetary reasons. The study used standard correlation and regression analysis. Results of the study for the most part did not confirm earlier conclusions about a possible explanation of the negative relationship between inflation and stock returns with those reasons.

Keywords: Stock returns; Inflation; Money illusion; Real shocks; Behavioral finance.
JEL classification: G12, G17, G38

Published: June 1, 2011  Show citation

ACS AIP APA ASA Harvard Chicago Chicago Notes IEEE ISO690 MLA NLM Turabian Vancouver
Havlíček, D. (2011). The Analysis of the Relationship between Stock Returns and Inflation: A Consequence of Real Shocks or Money Illusion? Czech Financial and Accounting Journal, 2011(2), 37-57. doi: 10.18267/j.cfuc.104
Download citation
  • BibTeX (.bib)
  • Bookends (.ris)
  • EasyBib (.ris)
  • EndNote (.enw)
  • EndNote 8 (.xml)
  • ISI WoS (.isi)
  • Medlars (.medlars)
  • Mendeley (.ris)
  • MODS (.xml)
  • Papers (.ris)
  • RefWorks (.txt)
  • RefManager (.ris)
  • RIS (.ris)
  • MS Word (.xml)
  • Zotero (.ris)
    • Open full article

    References

    1. Basak, S - Yan, H. (2009): Equilibrium Asset Prices and Investor Behavior in the Presence of Money Illusion. [on-line], New haven, Yale School of Management ICF Working Paper č. 08-23, c2009, [cit. 10. 3. 2011], <http://ssrn.com/abstract=1280267>.
    2. BCPP (2010): Statistické soubory - Burza cenných papírů Praha, a.s. [on-line], Praha, BCPP, c2010, [cit. 10. 11. 2010], <http://www.pse.cz/dokument.aspx?k=Statisticke-Soubory>.
    3. BLS (2010): Consumer Price Index. All Urban Consumers (CPI-U). U.S. City Average. [on-line], Washington D. C., U. S. Department Of Labor Bureau of Labor Statistics, c2010, [cit. 10. 11. 2010], <ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt>.
    4. CBO (2010): Congressional Budget Office. Budget and Economic Information. [on-line], Washington D. C., CBO, c2010, [cit. 10. 11. 2010], <http://www.cbo.gov/budget/budget.cfm>.
    5. Cozier, B. V. - Rahman, A. H. (1988): Stock Returns, Inflation, and Real Activity in Canada. Canadian Journal of Economics, 1988, roč. 21, č. 4, s. 759-774. Go to original source...
    6. ČNB (2010): ARAD - Systém časových řad - Česká národní banka. [on-line], Praha, ČNB, c2010, [cit. 10. 11. 2010], <http://www.cnb.cz/cnb/STAT.ARADY_PKG.VYSTUP?p_period=1&p_sort=2&p_des=50&p_sestuid=3087&p_uka=6&p_strid=AAADC&p_od=200201&p_do=201010&p_lang=CS&p_format=0&p_decsep=,>.
    7. ČSÚ (2010a): Makroekonomické údaje. [on-line], Praha, ČSÚ, c2010, [cit. 10. 11. 2010], <http://czso.cz/csu/redakce.nsf/i/cr:_makroekonomicke_udaje/$File/HLMAKRO.xls>.
    8. ČSÚ (2010b): Míra inflace. [on-line], Praha, ČSÚ, c2010, [cit. 10. 11. 2010], <http://www. http://czso.cz/csu/redakce.nsf/i/mira_inflace>.
    9. Day, T. E. (1984): Real Stock Returns and Inflation. Journal of Finance, 1984, roč. 39, č. 2, s. 493-502. Go to original source...
    10. Fama, E. F. (1981): Stock Returns, Real Activity, Inflation, and Money. American Economic Review, 1988, roč. 71, č. 4, s. 545-565.
    11. Fed (2010): Money Stock Measures. Billions of dollars. [on-line], Washington D. C., Board of Governors of the Federal Reserve System, c2010, [cit. 10. 11. 2010], <http://www.federalreserve.gov/releases/h6/hist/h6hist1.txt>.
    12. Fehr, E. - Tyran, J. R. (2001): Does Money Illusion Matter? American Economic Review, 2001, roč. 91, č. 5, s. 1239-1262. Go to original source...
    13. Fehr, E. - Tyran, J. R. (2004): Money Illusion and Coordination Failure. [on-line], Munich, CESIFO Working Paper č. 1141, c2004. [cit. 10. 3. 2011], <http://ssrn.com/abstract=495402>. Go to original source...
    14. Fisher, I. (1928): The Money Illusion. New York, Adelphi, 1928.
    15. Geske, R. - Roll, R. (1983): The Fiscal and Monetary Linkage Between Stock Returns and Inflation. Journal of Finance, 1983, roč. 38, č. 1, s. 1-33. Go to original source...
    16. Havlíček, D. (2009): Chování akciových trhů pohledem behavioral finance. Praha, Vysoká škola ekonomická, 2009, Diplomová práce.
    17. Havlíček, D. (2010): Price Bubble: The Case of Current Financial Crisis? Journal of International Scientific Publications, 2010, roč. 4, č. 1, s. 176-193.
    18. Kahneman, D. - Tversky, A. (1979): Prospect Theory: An Analysis of Decision under Risk. Econometrica, 1979, roč. 47, č. 2, s. 263-291. Go to original source...
    19. McNeil, B. J. - Pauker, S. G. - Sox, H. C. - Tversky, A. (1982): On the Elicitation of Preferences for Alternative Therapies. New England Journal of Medicine, 1982, roč. 306, č. 21, s. 1259-1262. Go to original source...
    20. Modigliani, F. - Cohn, R. (1979): Inflation, Rational Valuation, and the Market. Financial Analysts Journal, 1979, č. 35, s. 24-44. Go to original source...
    21. Shafir, E. - Diamond, P. - Tversky, A. (1997): Money Illusion. The Quarterly Journal of Economics, 1979, roč. 112, č. 2, s. 341-374. Go to original source...
    22. Veselá, J. (2003): Analýza trhu cenných papírů. Díl II, Fundamentální analýza. Praha, Vysoká škola ekonomická v Praze, 2003.
    23. Yahoo (2010): DJI Historical Prices. Dow Jones Industrial Avarage Stock. [on-line], Sunnyvale, Yahoo, c2010, [cit. 10. 11. 2010], <http://finance.yahoo.com/q/hp?s=^DJI+Historical+Prices>.

    This is an open access article distributed under the terms of the Creative Commons Attribution 4.0 International License (CC BY 4.0), which permits use, distribution, and reproduction in any medium, provided the original publication is properly cited. No use, distribution or reproduction is permitted which does not comply with these terms.


    Return to the content