Common Stocks as a Hedge Against Inflation: Evidence from Century-Long US Data

Abstract

We find strong evidence that U.S. common stocks have been a hedge against inflation from the early 1980’s. We use monthly S&P500 and Dow-Jones Industrial indices from 1900, and test whether stock price and goods price are co-integrated over time. We find a stable long run relationship between stock price and goods price with the unit elasticity, with stock return and inflation showing asymmetric adjustments to the long run equilibrium.

Keywords: asymmetry, co-integration, Fisher hypothesis, stock market

JEL Classification: E44, G1