ESTIMATING THE EFFECT OF INFLATION ON STOCK RETURNS USING REGIMEDEPENDENT IMPULSE RESPONSE ANALYSIS

Abstract

Abstract

This study investigates the effect of inflation on stock market in South Africa with regime-dependent impulse

response analysis. Nonlinear regime-dependent interaction is tested with the Markov switching vector autoregression

approach between July, 1995 and July, 2017. The results show that there is a negative impact

of inflation in the short-term, and that a long-term relationship does not exist. This indicates that common

stocks cannot be a hedge against inflation. The other findings relate to regime dependency and nonlinear

correlation. I also found that movements of stock market are strongly regime-dependent. These results are

robust in controlling additional macroeconomic variables.

Keywords

• stock market,fisher hypothesis,regime-dependent impulse response analysis

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