Extracting Inflation from Stock Returns to Test Purchasing Power Parity

Relative purchasing power parity (PPP) holds for pure price inflations, which affect prices of all goods and services by the same proportion, while leaving relative prices unchanged. Pure price inflations also affect nominal returns of all traded financial assets by exactly the same amount. Recogniz...

Full description

Saved in:
Bibliographic Details
Published inThe American economic review Vol. 95; no. 1; pp. 255 - 276
Main Authors Chowdhry, Bhagwan, Roll, Richard, Xia, Yihong
Format Journal Article
LanguageEnglish
Published Nashville American Economic Association 01.03.2005
Subjects
Capital market
Consumer Price Index
Economic models
Empirical research
Estimation
Exchange rates
Expectation
Financial assets
Foreign exchange rates
Germany
Inflation
Inflation rates
Japan
Methodology
Monetary economics
Monetary policy
Null hypothesis
P values
Point estimators
Price level
Prices
Purchasing power parity
Rates of return
Standard error
Stock prices
Stock returns
Studies
Time series
U.S.A
United Kingdom
Online AccessGet full text

Cover

More Information
Summary:Relative purchasing power parity (PPP) holds for pure price inflations, which affect prices of all goods and services by the same proportion, while leaving relative prices unchanged. Pure price inflations also affect nominal returns of all traded financial assets by exactly the same amount. Recognizing that relative PPP may not hold for the official inflation data constructed from commodity price indices because of relative price changes and other frictions that cause prices to be "sticky," we provide a novel method for extracting a proxy for realized pure price inflation from stock returns. We find strong support for relative PPP in the short run using the extracted inflation measures.
Bibliography:ObjectType-Article-2
SourceType-Scholarly Journals-1
ObjectType-Feature-1
content type line 23
ISSN:0002-8282
1944-7981
DOI:10.1257/0002828053828554