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Can Common Stocks Provide Hedge against Inflation? Evidence from SAARC Countries

Syed Zulfiqar Ali Shah, Zafar Mueen Nasir and Muhammad Naeem
The Pakistan Development Review
Vol. 51, No. 4, Papers and Proceedings PARTS I and II The 28th Annual General Meeting and Conference of the Pakistan Society of Development Economists Islamabad, November 13 - 15, 2012 (Winter 2012), pp. 435-447
Stable URL: http://www.jstor.org/stable/23734775
Page Count: 13
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Can Common Stocks Provide Hedge against Inflation? Evidence from SAARC Countries
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Abstract

Economists and financial analysts have always wondered whether or not investment in common stocks can provide hedge against inflation. In this paper we empirically tested this relationship between stock returns and inflation rate to assess the extent, if any, to which investment in common stocks provides a hedge against inflation in SAARC countries. Monthly data was used from period 1993 to 2011, employing ADF and PP test for unit root testing. By applying the ARDL bound testing approach we found that all countries included in the sample show a long run relationship between stock returns and inflation. We also applied ECM test which is significant in our result. It was also tested whether the relationship that exists between the two is a long term relationship or merely short term one. The findings were somewhat mixed.

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