Presented by-Yasha singh

4113007007

• Relationship between Stock Market Returns, Inflationary Trends and real activity as it pertains to the Indian economy

• Investing in developing countries – taking stakes in their growth prospects

• The study examines fishers hypothesis and find results to be contingent upon the proxy employed for measuring expected inflation.

• Inflation is found to be a significant determinant of stock returns even after controlling for current and future activity.

• Two hypothesis Examined :

• The Fisher Hypothesis nominal Stock returns and

inflationary expectations.

• The “proxy effect” hypothesis Fundamental macro

economic relation that characterize the economy.

• ARIMA (Autoregressive integrated moving average)

 an autoregressive integrated moving average

(ARIMA) model is a generalization of an autoregressive

moving average (ARMA) model.

• These models are fitted to time series data either to

better understand the data or to predict future points

in the series.

• ARIMA- based expectation model support the Fisher

hypothesis and the commonly held belief that

common stocks are a hedge against expected

inflation.

• The results also show that inflation is negatively

linked to both current and future real activity.

• Monthly stock returns are derived from the

continuous compounding of the daily closing

prices of the BSENI.

• Period : April 1984 to December 1992.

• Data from PTI Stock scan Service, Bombay.

• Reasons: Equally weighted index of 100 stocks.

• Express the relationship in joint hypothesis:

• Stock markets are efficient.

• Nominal return = expected real return + expected inflation rate

• Rt = α + βE(πt / Øt-1)+еt

• Rt – nominal return on market portfolio , π t – inflation rate

• E is expectations operator and Øt – information set available to

investor.

• If B=1 Asset or Portfolio is a perfect hedge against expected

inflation.

• Real returns and expected inflation rate vary independent

of each other. This extension involves decomposing of

inflation rate into an expected and unexpected component.

• Rt = α + β1E(π t / Øt-1)+β2[(π t –E(πt/ Øt-1)]+nt’

• unexpected component=Realized inflation rate and

expected inflation rate.

• Regression of real Stock returns on current and future real

Activity.

• (Rt- Πt)= α + β∑Tt+I

• Regression of inflation on current and future real

activity.

• Πt= α + β∑Tt+I

• Regression of real stock returns on inflationary

expectations and current and future real activity.

• (Rt- Πt)=α + β1E(Π)+ β2(Πt- E(Πt))+ β3∑Tt+i

• After examining two inter-related economic issues

with respect to the Indian stock market

• Fisher “There is a contingency on proxy employed

in measuring inflationary expectations”.

• ARIMA “Stock holding offer a hedge against

expected inflation

• It is contrary to oft-documented negative

relationship between stock return and inflation in

Developed economies

• Real stock returns are significantly positively related

to current real activity alone.