This study investigates the effect of inflation on stock market in South Africa with regime-dependent impulse
response analysis. Nonlinear regime-dependent interaction is tested with the Markov switching vector autoregression approach between July, 1995 and July, 2017. The results show that there is a negative impact
of inflation in the short-term, and that a long-term relationship does not exist. This indicates that common
stocks cannot be a hedge against inflation. The other findings relate to regime dependency and nonlinear
correlation. I also found that movements of stock market are strongly regime-dependent. These results are
robust in controlling additional macroeconomic variables.
Topic:
Inflation, Macroeconomics, Stock Markets, and Fisher Hypothesis