Stock returns and inflation nexus in Turkey: Evidence from ARDL bounds testing approach

Abstract

This study examines the long-run and causal relationships between stock market prices and consumer prices in Turkey. The bounds testing approach of cointegration is employed to investigate this relation by using quarterly data for 1987-2008 period. The bounds F-test for cointegration test yields evidence of a long-run relationship between stock market returns and inflation at 1% significance level. The study also explores the causal relationship between these variables in terms of the three error-correction based Granger causality models. The empirical results are as follows: i) The estimated long-run coefficient of the inflation is about unity and positive. ii) Any deviation from the long-run equilibrium between stock market returns and inflation is corrected about 32% for each period. iii) There is a strong evidence of unidirectional causality running from inflation to stock market returns. The overall results support the generalized Fisher hypothesis which implies that stocks offer a hedge against inflation.