An Analysis of the Asymmetry between the Stock Index and the Inflation Rate Using the Hidden Co-Integration Approach: A Case Study in Iran

The existing differences in the views about the relationship between stock return and inflation rate result from the diverging opionions of financial economists, and serve as evidences of an asymmetry between these variables. The present study attempts to examine the relationship between the inflation rate and the stock return index in Tehran Stock Exchange using the CECM model based on monthly time series data from April 2004 to September 2011. It is noteworthy that the model used in this study, in addition to analyzing the long-term nonlinear relationships between the variables, has another important capability for modeling asymmetry between different variables, particularly financial ones (based on the analyzed data). The results of this study confirmed the existence of an asymmetric relationship between the mentioned variables; only the negative components (shocks) of the stock index and inflation had a long-term relationship with each other, while the positive shocks were not significantly correlated.