Stock return and inflation with supply and demand shocks: evidence from Malaysia

The study provides evidence on the validity of the Fisher hypothesis, linking inflation and stock returns using Malaysian data over a period of 27-year from 1980 to 2006. The puzzling negative relationship between stock returns and inflation in industrialized economies is well documented. However, s...

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Main Authors:	Hawati Janor, Ruzita Abdul Rahim, Mohd Hasimi Yaacob, Izani Ibrahim
Format:	Article
Published:	Penerbit Universiti Kebangsaan Malaysia 2010
Online Access:	http://journalarticle.ukm.my/3368/ http://journalarticle.ukm.my/3368/

id	ukm-3368
recordtype	eprints
spelling	ukm-33682012-03-20T03:54:02Z http://journalarticle.ukm.my/3368/ Stock return and inflation with supply and demand shocks: evidence from Malaysia Hawati Janor, Ruzita Abdul Rahim, Mohd Hasimi Yaacob, Izani Ibrahim, The study provides evidence on the validity of the Fisher hypothesis, linking inflation and stock returns using Malaysian data over a period of 27-year from 1980 to 2006. The puzzling negative relationship between stock returns and inflation in industrialized economies is well documented. However, similar studies in different economies such as the developing or the emerging markets are limited. Emerging markets have gained importance and interests from international investors as financial assets and these markets have been identified as a means of international diversification which is capable of offering good returns. With this motivation, understanding factors that may influence stock returns in these markets is crucial. We improve the testing power of current studies by conducting a test that includes the role of demand and supply shocks to inflation. In doing so, we utilize the Autoregressive Distributed Lag (ARDL) bounds test that is capable of testing for the existence of a long-run relationship between the variables irrespective of whether the time series are I(0) or I(1). Inconsistent with the Fisher hypothesis, we find no long-run relationship between inflation and stock return. However, when money supply and industrial production are incorporated in the model, we find that stock returns, industrial production and money supply are the “long run forcing” variables for the inflation. The finding that inflation is not significant in explaining stock returns may suggest that the investment perception in the Malaysian financial markets is quite different from that found in other markets. Unlike the later, the former which does not support the Fisher hypothesis is thus less likely to be sensitive to inflationary variables. Overall the study provides evidence on the importance of sources of inflation (i.e. demand and supply shocks) on stock returns-inflation relationship in Malaysian market. Penerbit Universiti Kebangsaan Malaysia 2010-12 Article PeerReviewed Hawati Janor, and Ruzita Abdul Rahim, and Mohd Hasimi Yaacob, and Izani Ibrahim, (2010) Stock return and inflation with supply and demand shocks: evidence from Malaysia. Jurnal Ekonomi Malaysia, 44 . ISSN 0127-1962 http://www.ukm.my/penerbit/JEM/JEM-44-01-abstrak.html
repository_type	Digital Repository
institution_category	Local University
institution	Universiti Kebangasaan Malaysia
building	UKM Institutional Repository
collection	Online Access
description	The study provides evidence on the validity of the Fisher hypothesis, linking inflation and stock returns using Malaysian data over a period of 27-year from 1980 to 2006. The puzzling negative relationship between stock returns and inflation in industrialized economies is well documented. However, similar studies in different economies such as the developing or the emerging markets are limited. Emerging markets have gained importance and interests from international investors as financial assets and these markets have been identified as a means of international diversification which is capable of offering good returns. With this motivation, understanding factors that may influence stock returns in these markets is crucial. We improve the testing power of current studies by conducting a test that includes the role of demand and supply shocks to inflation. In doing so, we utilize the Autoregressive Distributed Lag (ARDL) bounds test that is capable of testing for the existence of a long-run relationship between the variables irrespective of whether the time series are I(0) or I(1). Inconsistent with the Fisher hypothesis, we find no long-run relationship between inflation and stock return. However, when money supply and industrial production are incorporated in the model, we find that stock returns, industrial production and money supply are the “long run forcing” variables for the inflation. The finding that inflation is not significant in explaining stock returns may suggest that the investment perception in the Malaysian financial markets is quite different from that found in other markets. Unlike the later, the former which does not support the Fisher hypothesis is thus less likely to be sensitive to inflationary variables. Overall the study provides evidence on the importance of sources of inflation (i.e. demand and supply shocks) on stock returns-inflation relationship in Malaysian market.
format	Article
author	Hawati Janor, Ruzita Abdul Rahim, Mohd Hasimi Yaacob, Izani Ibrahim,
spellingShingle	Hawati Janor, Ruzita Abdul Rahim, Mohd Hasimi Yaacob, Izani Ibrahim, Stock return and inflation with supply and demand shocks: evidence from Malaysia
author_facet	Hawati Janor, Ruzita Abdul Rahim, Mohd Hasimi Yaacob, Izani Ibrahim,
author_sort	Hawati Janor,
title	Stock return and inflation with supply and demand shocks: evidence from Malaysia
title_short	Stock return and inflation with supply and demand shocks: evidence from Malaysia
title_full	Stock return and inflation with supply and demand shocks: evidence from Malaysia
title_fullStr	Stock return and inflation with supply and demand shocks: evidence from Malaysia
title_full_unstemmed	Stock return and inflation with supply and demand shocks: evidence from Malaysia
title_sort	stock return and inflation with supply and demand shocks: evidence from malaysia
publisher	Penerbit Universiti Kebangsaan Malaysia
publishDate	2010
url	http://journalarticle.ukm.my/3368/ http://journalarticle.ukm.my/3368/
first_indexed	2023-09-18T19:38:35Z
last_indexed	2023-09-18T19:38:35Z
_version_	1777405437445931008

Stock return and inflation with supply and demand shocks: evidence from Malaysia

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