Inflation in international markets, Financial Management

Inflation in International Markets

In 1983, Gultekin tried to find out the relation between stock return and the inflation rates (expected/unexpected). He accomplished this by regressing the return of 14 local stock markets against expected and unexpected inflation as given by the time series model. The results of this study indicated a negative relation between stocks return and unexpected inflation in 7 countries. In Canada, Italy, Switzerland and the United States, a significant negative relation was observed. But each of the countries other than the United States indicated only half of the negative relations that were observed in the US. In case of the UK, the relation is significantly positive, which can be attributed to positive effect from oil inflation due to North Sea petroleum discoveries of the UK and the strong influence of import prices on its inflation rate. Interestingly, all these international conclusions obtained by conducting research between stock market return and inflation rate are more uncertain than the results found for the United States. This could be possible because of the different relations between the corporation and labor, and differences in tax rules. In most of the countries, only one set of books is used for reporting and tax purposes. In the United States, income generated by corporations are taxed twice, once at the corporate level and again at the personal level when dividends are received. The twice taxing phenomenon for the inflated dollars may be a cause for the US markets to be more responsive to inflation rates than any other markets.

In 1988, Solnik presented some contrary evidence, arguing that prior to free floating exchange rates, there were no independent monetary policies and different independent inflation rates were observed across countries. He concentrated his study on the post-Bretton Woods period and used interest rates as proxy for the inflation rates. He showed (as indicated in Table 3) a strong negative relationship between changes in interest rates and real returns generated for all the eight countries studied assuming the constant level of interest rates. Undoubtedly, if interest rates and inflation expectations in the international market are strongly related, a strong support will come to positive relationship observed in the United States between changes in inflation expectations and stock market returns.

 

Posted Date: 9/11/2012 4:56:26 AM | Location : United States







Related Discussions:- Inflation in international markets, Assignment Help, Ask Question on Inflation in international markets, Get Answer, Expert's Help, Inflation in international markets Discussions

Write discussion on Inflation in international markets
Your posts are moderated
Related Questions
Q. What do you mean by Sarbanes-Oxley? Sarbanes-Oxley (SOX) - Sarbanes-Oxley Act was signed into law on 30 July 2002 by President Bush. Act is designed to oversee the financial

Weighted Aggregates Index   In a weighted aggregates index, weights are assigned according to their significance and consequently the weighted index improves the accuracy of the

What are retained earnings?  Why are they important? Retained earnings denote the sum of all the earnings obtainable to common stockholders of a business throughout its whole h

explain the assumptions underlying Walter''s dividend model?

Explain the Implicit cost of capital Implicit cost of capital can be defined as the rate of return associated with the best investment opportunity for the firm and its Shareho

Is book value the best proxy to the value of the shares? No. According to A6 it would be a miracle if the number that appears in the Shareholders' Equity had anything to do wit

3. The following information are related to Sun Ltd. Paid-up equity capital ` 10,00,000 Earnings of the company ` 1,00,000 Dividend paid ` 80,000 Price - Earning rat

In 2005, Mr. Gordon Brown's brought up a plan of action to help reduce poverty and boost economic development in Africa. The three essential elements of the 2005 development plan

Cash flow matching strategy is used to build a bond portfolio wherein the cash flows of the bond portfolio exactly match a stream of liabilities. The most s

What are the characteristics of an efficient market? The term market efficiency denotes to the ease, speed, and cost of trading securities. In an efficient market the securitie