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Do Stock Returns Hedge against High and Low Inflation? Evidence from Brazilian Companies

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Author(s): Taufiq Choudhry | RENE COPPE PIMENTEL

Journal: Review of Finance and Banking
ISSN 2067-2713

Volume: 2;
Issue: 2;
Start page: 061;
Date: 2010;
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ABSTRACT
This paper investigates the relationship between stock returns and inflation usingmonthly data from ten Brazilian firms and the general Brazilian stock market. The periodunder investigation, 1986-2008, includes periods of unstable high inflation (1986-1994) andstable low inflation (1994-2008). Standard linear regressions are applied to estimate therelationship after testing first for the stochastic structure of the variables. Results indicatethat stock returns do act as a hedge against high inflation but fail to act against low inflation.Variance decomposition tests indicate innovations to the inflation rate affect the movementof the stock returns during the total period and the high inflation period
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