How do Economic Growth Asymmetry and Inflation Expectations Affect Fisher Hypothesis and Fama’s Proxy Hypothesis?

Yuan-Ming Lee; Kuan-Min Wang; Yuan-Ming Lee; Kuan-Min Wang

doi:10.3934/QFE.2017.4.428

Quantitative Finance and Economics

2017, Volume 1, Issue 4: 428-453. doi: 10.3934/QFE.2017.4.428

Previous Article Next Article

Research article Special Issues

How do Economic Growth Asymmetry and Inflation Expectations Affect Fisher Hypothesis and Fama’s Proxy Hypothesis?

Yuan-Ming Lee ¹,
Kuan-Min Wang ^{2
,
,}

1.
Department of Finance, No.1 Nan Tai Street, Yong-Kang Dist., Tainan City, 710 Taiwan, R.O.C
2.
Department of Finance, Overseas Chinese University, 100 Chiao Kwang Road, Taichung 40721, Taiwan, R.O.C

Received: 16 July 2017 Accepted: 08 November 2017 Published: 13 December 2017

Based on the threshold panel data model, this study employs the quarterly panel data of 38 countries between 1981 and 2014 to test whether economic growth asymmetry, expected inflation, and unexpected inflation affect the Fisher hypothesis and Fama's proxy hypothesis. The empirical results show the following: (1) When real economic growth rate is greater than the threshold (-0.009), Fisher hypothesis is supported. (2) When real economic growth rate is less than the threshold (-0.009), two scenarios hold true: before real variables are included, Fisher hypothesis is rejected; and when real variables are included, real economic growth is negative, inflation is expected, and thus, Fama's hypothesis is supported.
- stock return,
- economic growth,
- inflation expectation,
- threshold dynamic panel data model,
- Fama’s proxy hypothesis
Citation: Yuan-Ming Lee, Kuan-Min Wang. How do Economic Growth Asymmetry and Inflation Expectations Affect Fisher Hypothesis and Fama’s Proxy Hypothesis?[J]. Quantitative Finance and Economics, 2017, 1(4): 428-453. doi: 10.3934/QFE.2017.4.428

Related Papers:

Abstract

Based on the threshold panel data model, this study employs the quarterly panel data of 38 countries between 1981 and 2014 to test whether economic growth asymmetry, expected inflation, and unexpected inflation affect the Fisher hypothesis and Fama's proxy hypothesis. The empirical results show the following: (1) When real economic growth rate is greater than the threshold (-0.009), Fisher hypothesis is supported. (2) When real economic growth rate is less than the threshold (-0.009), two scenarios hold true: before real variables are included, Fisher hypothesis is rejected; and when real variables are included, real economic growth is negative, inflation is expected, and thus, Fama's hypothesis is supported.

References

[1]	Adrangi B, Battistel G, Chatath A, et al. (2005) An Empirical Examination of the Effects of Inflation and Hedging on Investments in the U.S. Air Transport Sector over the Period since Deregulation. J Bus Econ Res 3: 11–28.
[2]	Alvarez J, Arellano M (2003) The Time Series and Cross-section Asymptotics of Dynamic Panel Data Estimators. Econom 71: 1121–1159. doi: 10.1111/1468-0262.00441
[3]	Arellano M, Bond S (1991) Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations. Rev Econ Stud 58: 277–297. doi: 10.2307/2297968
[4]	Arellano M, Bover S (1995) Another Look at the Instrumental-Variable Estimation of Error-Components Models. J Econ 68: 29–51. doi: 10.1016/0304-4076(94)01642-D
[5]	Badillo R, Reverte C, Rubio E (2011) The Fisher effect in the EU revisited: New evidence using panel cointegration estimation with global stochastic trends. Applied Econ Lett 18: 1247–1251. doi: 10.1080/13504851.2010.532099
[6]	Balduzzi P (1995) Stock Returns, Inflation, and the Proxy Hypothesis:a New Look at the Data. Econ Lett 48: 47–53. doi: 10.1016/0165-1765(94)00568-M
[7]	Caporal T, Jung C (1997) Inflation and Real Stock Prices. Appl Financ Econ 7: 265–266. doi: 10.1080/096031097333619
[8]	Chen YC, Lin CC (2010) Threshold Effects in Cigarette Addiction: An Application of the Threshold Model in Dynamic Panels. Econ Bull 30: 3128–3142.
[9]	Cozier BV, Rahman AH (1988) Stock Return, Inflation, and Real Activity in Canada. Can J Econ 21: 759–774. doi: 10.2307/135262
[10]	Everaert G (2014) A panel analysis of the fisher effect with an unobserved Ι (1) world real interest rate. Econ Model 41: 198–210. doi: 10.1016/j.econmod.2014.05.005
[11]	Fama EF (1981) Stock Return, Real Activity, Inflation and Money. Am Econ Re 71: 545–546.
[12]	Fisher I (1930) The Theory of Interest, Macmillian, New York.
[13]	Gallagher LA, Taylor MP (2002) The Stock Return-Inflation Puzzle Revisited. Econ Lett 75: 147–156. doi: 10.1016/S0165-1765(01)00613-9
[14]	Geske R, Roll R (1983) The Fiscal and Monetary Linkage between Stock Returns and Inflation. J Financ 38: 1–33.
[15]	Granger CWJ, Terasvirta T (1993) Modeling Non-linear Economic Relationships, Oxford: Oxford University Press.
[16]	Hensan B (1999) Threshold Effects in Non-dynamic Panels: Estimation, Testing and Inference. J Econom 93: 345–368. doi: 10.1016/S0304-4076(99)00025-1
[17]	Im KS, Pesaran MH, Shin Y (2003) Testing for Unit Roots in Heterogeneous Panels. J Econom 115: 361–365.
[18]	Jones LE, Manuelli RE (1993) Growth and The effects of Inflation, NBER Working Paper No. 4523.
[19]	Kaul G (1987) Stock Returns and Inflation: the Role of the Monetary Sector. J Financ Econ 18: 253–276. doi: 10.1016/0304-405X(87)90041-9
[20]	Katzur T, Spierdijk L (2013) Stock returns and inflation risk: economic versus statistical evidence. Appl Financ Econ 23: 1123–1136. doi: 10.1080/09603107.2013.797556
[21]	Khan M, Senhadji A (2001) Threshold Effects in the Relationship Between Inflation and Growth. IMF Staff Papers 48: 1–21.
[22]	Kim JR (2003) The Stock Return-Inflation Puzzle and the Asymmetric Causality in Stock Returns, Inflation and Real Activity. Econ Lett 80: 155–160. doi: 10.1016/S0165-1765(03)00059-4
[23]	Kim JH, Ryoo HH (2011) Common stocks as a hedge against inflation: Evidence from century-long US data. Econ Lett 113: 168–171. doi: 10.1016/j.econlet.2011.07.003
[24]	Lee BS (1992) Causal Relations among Stock Returns, Interest Rates, Real Activity, and Inflation. J Financ 47: 1591–1603. doi: 10.1111/j.1540-6261.1992.tb04673.x
[25]	Lee BS (2010) Stock returns and inflation revisited: An evaluation of the inflation illusion hypothesis. J Bank Financ 34: 1257–1273.
[26]	Levin A, Lin CF, Chu C (2002) Unit Root Tests in Panel Data: Asymptotic and Finite-Sample Properties. J Econom 108: 1–24. doi: 10.1016/S0304-4076(01)00098-7
[27]	Liu Y, Hsueh L, Clayton R (1993) A Re-Examination of the Proxy-Effect Hypothesis. J Financ Res 16: 261–268. doi: 10.1111/j.1475-6803.1993.tb00145.x
[28]	Maddala GS, Wu S (1999) A Comparative Study of Unit Roots with Panel Data and A New Simple Test. Oxford Bull Econ Statics 61: 631–652. doi: 10.1111/1468-0084.61.s1.13
[29]	Madsen JB (2005) The Fisher Hypothesis and the Interaction between Share Returns, Inflation and Supply Shocks. J Int Money Financ 24: 103–120. doi: 10.1016/j.jimonfin.2004.11.003
[30]	Nelson CR (1976) Inflation and Rates of Return on Common Stocks. J Financ 31: 471–483. doi: 10.1111/j.1540-6261.1976.tb01900.x
[31]	Okuyan HA (2013) Real Macroeconomic Variables and Stock Prices: Evidence from Turkey. J Empir Res 3: 654–662.
[32]	Omotor DG (2012) Relationship between Inflation and Stock Market Returns: Evidence from Nigeria. J Appl Stat 1: 1–16. doi: 10.12785/jsap/010101
[33]	Ozcan B, Ari A (2015) Does the Fisher hypothesis hold for G7? Evidence from the panel cointegration test. Econ Res-èkon Istraz 28: 271–283.
[34]	Sarel M (1996) Nonlinear Effects of Inflation on Economic Growth. IMF Staff papers, Int Monet Fund 43: 199–215. doi: 10.2307/3867357
[35]	Schmeling M, Schrimpf A (2011) Expected Inflation, Expected Stock Returns, and Money Illusion: What can We Learn from Survey Expectation. European Econ Rev 55: 702–719. doi: 10.1016/j.euroecorev.2010.09.003
[36]	Tsong CC, Lee CF (2013) Quantile cointegration analysis of the Fisher hypothesis. J Macroecon 35: 186–198. doi: 10.1016/j.jmacro.2012.11.001
[37]	Westerlund J (2008) Panel cointegration tests of the Fisher effect. J Appl Econom 23: 193–233. doi: 10.1002/jae.967

Reader Comments

Your name:*

Email:*
© 2017 the Author(s), licensee AIMS Press. This is an open access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0)