Original Articles

The Association between Stock Market Returns and Rates of Inflation

Published in: De Ratione
Volume 2, issue 1, 1988, pages: 11–18
DOI: 10.1080/10108270.1988.11434994
Author(s): C. de J CorreiaUniversity of Cape Town,, M. P. WormaldUniversity of Cape Town,


This paper empirically tests whether there is a direct relationship between expected inflation and share returns on the Johannesburg Stock Exchange. The study tests the Fisherian Hypothesis that nominal share returns are made up of a real return plus the expected inflation rate. The real return is determined by real factors in the economy and Is therefore independent of the expected inflation rate. The contemporaneous Inflation rate and leads and lags in inflation rates are used as proxies for expected inflation. The results of the tests were not consistent with the Fisherian Hypothesis; OLS estimates indicated zero correlation between share returns and expected inflation. Tests were performed on the relationship between share returns and short term interest rates. A statistically significant inverse relationship was found between share returns and the contemporaneous change in interest rates. This paper casts doubt on the widely held view that share returns are directly related to inflation with high rates of inflation supporting high stock market prices.

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