Jan Overgaard Olesen
Jan Overgaard Olesen: Department of Economics, Copenhagen Business School, Postal: Department of Economics, Copenhagen Business School, Solbjerg Plads 3 C, 5. sal, DK-2000 Frederiksberg, Denmark
Abstract: We suggest an alternative approach to testing whether stocks provide a hedge against
inflation in the long run. Based on a simple structural model, we test the hedge hypothesis in
terms of the long-run linkage between stock prices and the general price level, as estimated
by cointegration analysis. Using data for the Danish stock market over the post-World War
II-period, results give strong support for the hedge property, defined in the narrow sense of
a perfect hedge. This contrasts with the weak support found in the literature and also
represents stronger support than produced by standard methods. We argue that our
approach has the advantage of allowing for a clear distinction between short- and long-run
dynamics of stock prices which adjust slowly to long-run equilibrium.
55 pages, March 1, 2000
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