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A Reexamination of Real Stock Returns, Real Interest Rates, Real Activity, and Inflation: Evidence from a Large Data Set
Author(s) -
Jones Paul M.,
Olson Eric,
Wohar Mark E.
Publication year - 2017
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/fire.12137
Subject(s) - economics , econometrics , vector autoregression , proxy (statistics) , stock (firearms) , inflation (cosmology) , mathematics , statistics , physics , theoretical physics , engineering , mechanical engineering
Using the informational sufficiency procedure from Forni and Gambetti (2014) along with data from McCracken and Ng (2014), we update the results of Lee (1992) and find that his vector autoregression (VAR) is informationally deficient. To correct this problem, we estimate a factor augmented VAR (FAVAR) and analyze the differences once informational deficiency is corrected with an emphasis on the relationship between real stock returns and inflation. In particular, we examine Modigliani and Cohn's (1979) inflation illusion hypothesis, Fama's (1983) proxy hypothesis, and the “anticipated policy hypothesis.”