| Author(s) | Hamad S. AI-Razai |
| Affiliation | Economics Department, King Saud University Riyadh, Saudi Arabia |
| Title | Are Stocks a Good Hedge against Inflation: A Study of the Relationships between Stock Returns and Inflation in Saudi Arabia |
| Source | Journal of King Saud University. Administrative Sciences. Volume 11, No 1. (1999/1419) |
| Abstract | This paper uses monthly data to investigate the relationship between inflation rate and stock returns in the Saudi Stock market (Fisher effect). It uses cointegration approach and causality analysis to determine the direction of causation between the variables ( overall market return and the return of stocks in the most traded sectors, banking, industry, and services). Before testing for cointegration, statistical properties of the data have been analyzed using unit root tests. It was found that each series is difference stationary. The empirical results do not lend support to the existence of co integration between inflation rate and the different stock returns. This means that there is no long-run equilibrium relationships between these variables. Causality tests suggest no clear causality pattern between inflation rate and stock returns. The paper also generates expectations about inflation using different approaches. It is found that neither expected nor unexpected inflation affects stock returns. These results hold regardless of the expectations generating process. The only exception is the effect of unexpected inflation on services stock returns which is significant. However, the overall results support the Fisher hypothesis (reject Fama proxy hypothesis) and, thus, it can be said the Saudi stocks may be considered a good hedge against inflation. |
