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How do Economic Growth Asymmetry and Inflation Expectations Affect Fisher Hypothesis and Fama’s Proxy Hypothesis?

1 Department of Finance, No.1 Nan Tai Street, Yong-Kang Dist., Tainan City, 710 Taiwan, R.O.C
2 Department of Finance, Overseas Chinese University, 100 Chiao Kwang Road, Taichung 40721, Taiwan, R.O.C

Special Issue: Volatility of Prices of Financial Assets

Based on the threshold panel data model, this study employs the quarterly panel data of 38 countries between 1981 and 2014 to test whether economic growth asymmetry, expected inflation, and unexpected inflation affect the Fisher hypothesis and Fama’s proxy hypothesis. The empirical results show the following: (1) When real economic growth rate is greater than the threshold (-0.009), Fisher hypothesis is supported. (2) When real economic growth rate is less than the threshold (-0.009), two scenarios hold true: before real variables are included, Fisher hypothesis is rejected; and when real variables are included, real economic growth is negative, inflation is expected, and thus, Fama’s hypothesis is supported.
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Keywords stock return; economic growth; inflation expectation; threshold dynamic panel data model; Fama’s proxy hypothesis

Citation: Yuan-Ming Lee, Kuan-Min Wang. How do Economic Growth Asymmetry and Inflation Expectations Affect Fisher Hypothesis and Fama’s Proxy Hypothesis?. Quantitative Finance and Economics, 2017, 1(4): 428-453. doi: 10.3934/QFE.2017.4.428

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