Extracting Inflation from Stock Returns to Test Purchasing Power Parity
We provide a novel method for extracting estimates of realized pure price inflation from stock returns. The key is recognizing that pure price inflation should affect nominal returns of all traded assets by exactly the same amount. The popular Fama-French three-factor model is employed to purge stock returns of real economic factors. We uncover evidence that purchasing power parity holds quite well using the extracted inflation measures.
Year of publication: |
2003-06
|
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Authors: | Chowdhry, Bhagwan ; Roll, Richard ; Xia, Yihong |
Institutions: | Weiss Center for International Financial Research, Wharton School of Business |
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