Equity Returns and Inflation: The Puzzlingly Long Lags

Research in Finance and Banking, Vol. 2, 2001

18 Pages Posted: 6 Nov 2004  

James R. Lothian

Gabelli School of Business, Fordham University; National Bureau of Economic Research (NBER)

Cornelia H. McCarthy

Gabelli School of Business, Fordham University

Abstract

This paper examines data for stock prices and price levels of 14 developed countries during the post-WWII era and compares their behavior in that sample with behavior over the past two centuries in the UK and the US. Contrary to much of the literature of the past several decades, we find that nominal equity prices do, in fact, keep pace with movements in the overall price level. Our results suggest, however, that this is only the case over long periods. The puzzle therefore is not that equities fail the test as inflation hedges, as had been quite widely believed, but that they take so long to pass.

Keywords: Stock prices, inflation, Fisher effect, neutrality, cointegration

JEL Classification: G10, E44

Suggested Citation

Lothian, James R. and McCarthy, Cornelia H., Equity Returns and Inflation: The Puzzlingly Long Lags. Research in Finance and Banking, Vol. 2, 2001. Available at SSRN: https://ssrn.com/abstract=613907

James R. Lothian

Gabelli School of Business, Fordham University ( email )

113 West 60th Street
New York, NY 10023
United States
212-636-6147 (Phone)
212-765-5573 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Cornelia H. McCarthy (Contact Author)

Gabelli School of Business, Fordham University ( email )

113 West 60th Street
New York, NY 10023
United States
212-636-6139 (Phone)

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