Inflation and Stock Returns in 18 OECD Countries: Some Robust Panel Integration and Cointegration Tests

Abstract

Applying Im, Pesaran and Shin (2003) and Pesaran (2007) approach, we examine the presence of unit roots in inflation rates and stock returns of 18 OECD countries. Under the assumption of cross sectional dependence, results support unit roots in our sample. Application of Johansen (1991) test fails to detect cointegration in some cases. Larsson, Lyhagen and Löthgren (2001) panel test provides strong evidence of cointegration for all the countries in the sample. We fail to support the presence of a uniformly positive relationship between inflation and stock returns, thus casting some doubt over equities as effective long run inflation hedges.