The effect of inflation on stock returns: some KLSE evidence

Fisher's Hypothesis stated that the expected rate of return on assets consists of a "real return" and "expected inflation rate". When applied to stock investment, it it said that the stock market should provide a complete hedge against inflation, thereby indicating a positive relation between inflation and stock returns. The study try to determine whether Fisher's proposition are acceptable in the Malaysian stock market. The period from 1984 to 1993 is examined, using quarterly Consumer Price Index (CPI) and selected stock indices data. The returns on stock indices are regressed against the growth of CPI using Least Square Method on a Single Linear Function. The empirical study shows mixed results. The Industrial Index indicates a negative relationship, while the EMAS, Composite, Finance and Property Indices proposed a positive relationships. Although the latter Indices tends to be positive, none are statistically significant. Therefore, it is concluded that the Malaysian stock market does not provide a hedge against inflation on the empirical approaches that have been applied.