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- Title
THE VARIATION OF THE RETURN ON STOCKS IN PERIODS OF INFLATION.
- Authors
Oudet, Bruno A.
- Abstract
The bear market of the late sixties amidst inflation has led to growing concern over the validity of the proposition that stocks provide a good hedge against inflation. Conflicting arguments have been raised on both sides of the issue but a synthesis has as yet failed to emerge. The gains resulting from a careful assessment of the various propositions are obvious. If stock prices are adversely affected by inflation, the financial analyst must search for other hedges against the erosion of the purchasing power of money, while the economist must note that inflation has a depressing effect on economic growth through the rise of the cost of capital. This paper attempts to advance the assessment of variations in the returns on stock investments during periods of inflation. The analysis is carried out in three steps. First, the principal arguments used to explain variations of stock prices in periods of inflation are reviewed in the framework of the traditional stock-valuation model. Empirical evidence is then presented showing the behavior of stock returns in recent inflations. Finally, a simultaneous two-equation model that permits one to estimate the effect on stock returns of the variables involved is specified. The reduced-form equations ultimately estimated clearly show that inflation had a negative effect on stock returns in the last two decades.
- Subjects
EFFECT of inflation on investments; STOCKS (Finance); RATE of return; DEBT-to-equity ratio; STOCK prices; PRICE inflation
- Publication
Journal of Financial & Quantitative Analysis, 1973, Vol 8, Issue 2, p247
- ISSN
0022-1090
- Publication type
Article
- DOI
10.2307/2330021