Pages: (26-42 )
Abstract
This paper empirically examines the dynamic relationship between stock price and inflation using the non-linear autoregressive distributed lag (NARDL). The NARDL co-integration framework allows us to capture the long-term and short-term asymmetric effects of the consumer price index on the stock price. The bounds test indicates the existence of asymmetric co-integration between real stock price and inflation. Our empirical findings reveal an asymmetric long-run response of stock price to the consumer price index. In the long-run, positive changes in the consumer price index are negatively related to stock price but not significant while negative changes are positive and significantly related to the consumer price index. There is also evidence supporting short-run asymmetry between stock price and consumer price index. The effect of both positive and negative changes in the consumer price index on the stock price is negative and significant. Our findings indicate that stock returns could serve as a hedge against inflation in
the long-run only when inflation is declining.
Keywords: stock price, inflation,