Stock prices, inflation and inflation uncertainty in the U.S.: testing the long-run relationship considering Dow Jones sector indexes
Résumé
We test for the long-run relationship between stock prices, inflation and its uncertainty for different U.S. sector stock indexes, over the recent time-span, namely 2006M1-2015M5. For this purpose we use a cointegration analysis with one structural break to capture the crisis effect, and two alternative measures of inflation uncertainty relying on a time-varying unobserved component model. In line with recent empirical studies we discover that in the long-run, the inflation and its uncertainty negatively impact the stock prices, opposed to the well-known Fisher effect. However, in the short-run the results are mixed, providing evidence for complex interdependences between stock prices, inflation and its uncertainty. Our results are robust regarding the use of a bounded or unbounded inflation trend for measuring the uncertainty, and a slight difference is noticed between different sector indexes.
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