STOCK PRICES AND INFLATION IN MALAYSIAN EQUITY MARKETS

Abstract

A negative relationship between real return and inflationary trends in developed markets has been widely documented in Europe and US. This paper investigates this relationship in the light of the Generalized Fisher’s Hypothesis (GFH) for Malaysian equity markets using quarterly data from 1987 :1 to 2006:1. The results from using both ARIMA and Ordinary least square (OLS) with White (1980) hetrocidasticity-consistent and White (1984) autocorrelation-consistent covariance matrix models provide evidence of the independence and positive relationship between stock returns-inflation relationships and hence, concluded that the GFH do hold in the Malaysian stock market. This in turn implies that common stocks provide an effective hedge against inflation.