EQUITY INVESTMENT AND INFLATION WITH SPECIAL REFERENCE TO PROPERTY STOCKS

Abstract

Inflation risk is crucial to any consideration of investment performance. The main aim of this study is to examine the correlation between common stocks, especially property stocks, and the rate of inflation. The starting point of this study is Fisher's hypothesis. It is a common belief that since common stock is a claim to future cash flow, its return should correlate directly on a positive one-to-one basis with the rate of inflation. But most of the studies have either shown a negative correlation or are inconclusive. In this study, the author employs linear regression techniques to examine the correlation between stock returns and inflation. The historical returns were also examined. Contrary to the results of other studies, the correlation was found to be positive and significant in some instances. But generally, the findings are inconclusive. However, the historical returns were found to cover inflation adequately.