Previous research has documented a negative relation between inflation and stock returns in the U.S. and selected developed countries during the post-war era. Their findings are inconsistent with the classical theory that real returns to the ownership of capital goods, such as stocks, are invariant to the general price level. / There seems to be a foregone conclusion that in the short-run when counter-cyclical measures are applied by developed countries to contain inflation, stock returns are negatively related to inflation. It will be interesting to know whether the above observation can also be found in emerging markets such as Hong Kong. / This paper finds that stock returns and inflation in Hong Kong are generally positively related, but the relation is statistically insignificant. It also finds that there is a reverse causal relation through which stock returns influence inflation in Hong Kong. This wealth effect is evident in all three periods tested, and is statistically significant in two of the three tested periods. / This paper finds that money supply (“M2”) can be a good indicator of stock market performance. We find that M2 is positively related to stock returns in Hong Kong in all three periods tested with very significant t-statistics. Investors can use this information to enhance their prediction of the overall stock market performance and thus improve their investment return. / U.S. investors can invest in Hong Kong stocks to enhance their real return. This paper finds that there is a positive relation between U.S. inflation and Hong Kong stock market return which may qualify Hong Kong stocks as a hedge against inflation for U.S. investors. As an emerging market, Hong Kong's inflation has been higher than that in the U.S. Stock market returns are also higher than those in the U.S. in nominal terms and in real terms against U.S. inflation. Also, the currency board system implemented in Hong Kong has virtually eliminated currency risk for U.S. investors during the past 20 years, although there is no guarantee that such a system will remain forever. However, we find that the portfolio performance of Hong Kong stocks and U.S. stocks, adjusted for the volatility factor, have been very similar during the last two decades. We therefore are not able to conclude that investing in Hong Kong stocks is superior to investing in U.S. stocks. U.S. investors should consider their portfolio mix and risk tolerance level carefully before investing in Hong Kong stocks. / Although the positive relation between inflation and stock market return found in this paper is not statistically significant, we did find a strong negative relation between deflation and stock returns during the deflationary period in Hong Kong. This result is statistically significant and is in general consistent with our finding of the positive relation between inflation and stock returns, but much stronger statistically. As recent developments indicate that the likelihood of the world economy experiencing disinflation or deflation is increasing, more studies should be done regarding the relation between deflation and other economic variables, such as stock returns. / Thesis (PhDBusinessandManagement)--University of South Australia, 2004.
| Identifer | oai:union.ndltd.org:ADTP/267657 |
| Creators | Lau, Frederic S. C. |
| Source Sets | Australiasian Digital Theses Program |
| Language | English |
| Detected Language | English |
| Rights | copyright under review |
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