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Extracting Inflation from Stock Returns to Test Purchasing Power Parity

Chowdhry, Bhagwan and Roll, Richard and Xia, Yihong (2005) Extracting Inflation from Stock Returns to Test Purchasing Power Parity. American Economic Review, 95 (1). pp. 255-276. ISSN 0002-8282. doi:10.1257/0002828053828554.

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Relative purchasing power parity (PPP) holds for pure price inflations, which affect prices of all goods and services by the same proportion, while leaving relative prices unchanged. Pure price inflations also affect nominal returns of all traded financial assets by exactly the same amount. Recognizing that relative PPP may not hold for the official inflation data constructed from commodity price indices because of relative price changes and other frictions that cause prices to be "sticky," we provide a novel method for extracting a proxy for realized pure price inflation from stock returns. We find strong support for relative PPP in the short run using the extracted inflation measures.

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Additional Information:© 2005 American Economic Association. The authors thank Werner Antweiler for providing the foreign exchange rate data; Kent Daniel, Ken French, and Xiaoyan Zhang for providing the Fama-French factor returns data; Ben Bernanke (the editor), three anonymous referees, Marshall Blume, Michael Brennan, Nai-fu Chen, John Cochrane, Bernard Dumas, Philippe Jorion, Andrew Karolyi, Yrjö Koskinen, seminar participants at the Tenth Georgia Tech International Finance Conference, California State University Fullerton, HEC France, the Stockholm School of Economics, and the brown-bag lunch seminar series at The Wharton School for useful comments on earlier drafts of the paper. Xia acknowledges the financial support of the Weiss Center at the Wharton School, University of Pennsylvania.
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University of PennsylvaniaUNSPECIFIED
Issue or Number:1
Classification Code:JEL: F31, G15
Record Number:CaltechAUTHORS:20190506-154424918
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Official Citation:Chowdhry, Bhagwan, Richard Roll, and Yihong Xia. 2005. "Extracting Inflation from Stock Returns to Test Purchasing Power Parity." American Economic Review, 95 (1): 255-276
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:95269
Deposited By: Tony Diaz
Deposited On:06 May 2019 22:49
Last Modified:16 Nov 2021 17:11

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