ESTIMATING THE EFFECT OF INFLATION ON STOCK RETURNS USING REGIMEDEPENDENT IMPULSE RESPONSE ANALYSIS

AbstractThis study investigates the effect of inflation on stock market in South Africa with regime-dependent impulseresponse analysis. Nonlinear regime-dependent interaction is tested with the Markov switching vector autoregressionapproach between July, 1995 and July, 2017. The results show that there is a negative impactof inflation in the short-term, and that a long-term relationship does not exist. This indicates that commonstocks cannot be a hedge against inflation. The other findings relate to regime dependency and nonlinearcorrelation. I also found that movements of stock market are strongly regime-dependent. These results arerobust in controlling additional macroeconomic variables.

Keywords:

stock market, fisher hypothesis regime-dependent impulse response analysis,

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