Can Canadian Stock market provide complete hedge against Inflation ?

NEIFAR, MALIKA and HarzAllah, AMIRA (2020): Can Canadian Stock market provide complete hedge against Inflation ?

Abstract

This study empirically assesses the relationship between inflation and stock return in Canadian stock market. The study has covered data for the period 1999 :M1−2018 :M4 of canadian economy. Inflation has been decomposed to predicted and unpredicted phase by MA filter. First it has tested three hypothesis within static model : Fisher hypothesis, Fama and Schwert approach, and Fama’s proxy effect framework. These investigations support Fisher Hypothesis. It has showed that Canadian stock market provides a complete hedge against Inflation. Second, since relationships between Stock price and inflation may not be correctly specified in the static linear regression, linear and non linear autoregressive dynamic specification have been tested. ARDL and NARDL model with Expected inflation as regressor conclude that Stock price cannot be used as a hedge against inflation. Finding of NARDL precise that only partial sum of the negative changes in Expected inflation have significant effect on canadian stock market. Then inefficiency of the canadian stock market suggests that information on past values of inflation could provide opportunities for abnormal gains from the canadian stock market.

• Item Type: MPRA Paper
• Language: English
• Keywords: Static model ; Fisher hypothesis ; Stock price ; Expected inflation, cointegration, Dynamic model, ARDL, NARDL, symmetrie, asymmetrie.
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; G - Financial Economics > G1 - General Financial Markets; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates; G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading

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