ARDL bounds tests and robust inference for the long run relationship between real stock returns and inflation in Australia

Research output: Contribution to journalArticleResearchpeer-review

Abstract

This paper conducts an empirical investigation into the long run relationship between real stock returns and inflation in Australia by employing the ARDL bounds tests. There exists a stock return?inflation long run relationship, and the long run parameters are non-linear functions of those of the conditional error correction model. The OLS estimates of the latter model constitute the long run parameter estimates and their standard errors are estimated by delta methods. The long run model estimates so constructed can be biassed and inconsistent, and the delta method is derived assuming asymptotic normality, which does not hold in this investigation. In this paper, to overcome these limitations of the traditional methods, we employ the bias-corrected bootstrap method. As a consequence, the robust and reliable statistical inference can be made on the long run return?inflation relationship. The empirical results show that the expected inflation had no significant effect on real stock returns, while the observed inflation had a significant and negative effect. Furthermore, the data generating process of the returns?inflation relationship was not affected by the change in monetary policy regime in the early 1990s. These findings imply that Australian stocks have been very effective instruments for hedging against expected inflation. Because of the resilience of Australian economy to the current global financial and economic crisis, this finding has implications for long term domestic and foreign investors in Australia.
Original languageEnglish
Pages (from-to)535 - 543
Number of pages9
JournalEconomic Modelling
Volume29
Issue number3
DOIs
Publication statusPublished - 2012

Cite this

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title = "ARDL bounds tests and robust inference for the long run relationship between real stock returns and inflation in Australia",
abstract = "This paper conducts an empirical investigation into the long run relationship between real stock returns and inflation in Australia by employing the ARDL bounds tests. There exists a stock return?inflation long run relationship, and the long run parameters are non-linear functions of those of the conditional error correction model. The OLS estimates of the latter model constitute the long run parameter estimates and their standard errors are estimated by delta methods. The long run model estimates so constructed can be biassed and inconsistent, and the delta method is derived assuming asymptotic normality, which does not hold in this investigation. In this paper, to overcome these limitations of the traditional methods, we employ the bias-corrected bootstrap method. As a consequence, the robust and reliable statistical inference can be made on the long run return?inflation relationship. The empirical results show that the expected inflation had no significant effect on real stock returns, while the observed inflation had a significant and negative effect. Furthermore, the data generating process of the returns?inflation relationship was not affected by the change in monetary policy regime in the early 1990s. These findings imply that Australian stocks have been very effective instruments for hedging against expected inflation. Because of the resilience of Australian economy to the current global financial and economic crisis, this finding has implications for long term domestic and foreign investors in Australia.",
author = "Mustabshira Rushdi and Jae Kim and Paramsothy Silvapulle",
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doi = "10.1016/j.econmod.2011.12.017",
language = "English",
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journal = "Economic Modelling",
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ARDL bounds tests and robust inference for the long run relationship between real stock returns and inflation in Australia. / Rushdi, Mustabshira; Kim, Jae; Silvapulle, Paramsothy.

In: Economic Modelling, Vol. 29, No. 3, 2012, p. 535 - 543.

Research output: Contribution to journalArticleResearchpeer-review

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AB - This paper conducts an empirical investigation into the long run relationship between real stock returns and inflation in Australia by employing the ARDL bounds tests. There exists a stock return?inflation long run relationship, and the long run parameters are non-linear functions of those of the conditional error correction model. The OLS estimates of the latter model constitute the long run parameter estimates and their standard errors are estimated by delta methods. The long run model estimates so constructed can be biassed and inconsistent, and the delta method is derived assuming asymptotic normality, which does not hold in this investigation. In this paper, to overcome these limitations of the traditional methods, we employ the bias-corrected bootstrap method. As a consequence, the robust and reliable statistical inference can be made on the long run return?inflation relationship. The empirical results show that the expected inflation had no significant effect on real stock returns, while the observed inflation had a significant and negative effect. Furthermore, the data generating process of the returns?inflation relationship was not affected by the change in monetary policy regime in the early 1990s. These findings imply that Australian stocks have been very effective instruments for hedging against expected inflation. Because of the resilience of Australian economy to the current global financial and economic crisis, this finding has implications for long term domestic and foreign investors in Australia.

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