This study reviews the literature concerned with the apparent historical negative relationship between stock returns and inflation. Seven possible explanations for the negative relationship are compared and tested. These include the rational expectations based explanations of Fama and of Geske and Roll, the risk-premium explanation, a tax-related explanation and two portfolio adjustment explanations, one derived from monetarist theory and the other from Tobin. The irrational investor hypothesis of Modigliani and Cohn is also examined. Testing methodology includes Box-Jenkins ARIMA techniques with transfer functions. / The results of the study contradict all of the explanations except the portfolio adjustment view of Tobin and the view that investors are behaving irrationally. Found also, is that the negative relationship between stock returns and inflation is very weak if it exists at all: instead interest rate changes are the dominant factor determining stock returns. The examination of whether the earnings yield best represents a real or a nominal return, leads to the conclusion that the nominal yield view holds up best historically and that a portfolio adjustment process based on interest rates is not irrational. A successful trading rule based on interest rates is devised to exploit an apparent case of market inefficiency. / Source: Dissertation Abstracts International, Volume: 47-08, Section: A, page: 3141. / Thesis (Ph.D.)--The Florida State University, 1986.
| Identifer | oai:union.ndltd.org:fsu.edu/oai:fsu.digital.flvc.org:fsu_75919 |
| Contributors | PUGH, WILLIAM N., Florida State University |
| Source Sets | Florida State University |
| Detected Language | English |
| Type | Text |
| Format | 188 p. |
| Rights | On campus use only. |
| Relation | Dissertation Abstracts International |
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