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Inflation Rate Research Paper

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.3.3 Inflation Rate
The inflation rate used as an indicator in measuring the stability of economic condition for a particular country (Rashid et al., 2011). In financial theory, inflation rate reflected by consumer price index (CPI) represents all the price of goods and services will go up and it need to take more money to buy the same items. Moreover, high inflation is likely cause a great impact on economic activities of a particular country because it reduces the purchasing power of domestic consumers and it would lead to currency value decline. The previous researchers believe that the inflation rate will influence the stock market return.

There are many empirical studies establish that the inflation rate has an impact on stock market …show more content…

Khil & Lee (2000) investigate on ten pacific countries and the US stated that all the countries except Malaysia the negative relationship between inflation and stock market return. Adam & Tweneboah (2008) used the consumer price index, employing co-integration test and vector error correlation model (VECM) as analytical techniques, the study found that the lagged values of inflation have negative significant effects on the stock market. Moreover, Fama & Schwert (1997) found a negative relationship between inflation rate and stock market return. They used data from Bureau of Labor Statistic Consumer Price Index (CPI) to estimate the inflation rate and used an equally weighted portfolio of New York Stock Exchange as stock market return. They concluded that when the inflation is high, then the stock market return will …show more content…

(2010) examine the relationship between inflation rate and stock market return in both short term and medium term under different inflationary regimes for United Kingdom. They found that expected inflation and stock market return are positively related, while unexpected inflation and stock market returns are negatively related. This result concludes that there is different relationship between inflation and stock market return in different inflationary regimes. On the other hand, Kaul and Seyhun (1990) have found that the negative relationship between and expected and unexpected inflation and stock market return is due the negative effect of relative price variability on the stock market. It is largely reflected by the supply

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