Fisher Hypothesis Research Articles

Irish stock returns and inflation: a long span perspective

A major issue in financial economics is the behaviour of stock returns over long as opposed to short horizons. This paper looks at the relationship between continuously compounded nominal returns and inflation over both short and long horizons. Using over two centuries of annual data for Ireland, this paper finds support for the Generalized Fisher Hypothesis; namely that real stock returns are independent of expected inflation over the long run, and a positive relationship between ex post long-horizon nominal stock returns and inflation.

ARE COMMON STOCKS A HEDGE AGAINST INFLATION?

AbstractWe test whether U.K. common stocks hedge against inflation using a framework of the tax‐augmented Fisher hypothesis. Aggregate and disaggregate (seven industry groups) monthly data covering 48 years are used. All pairs of stock and retail price indexes are cointegrated. Tests in most cases reveal significant shifts in the cointegrating vectors, and accounting for these shifts improves the precision of the estimates. The point estimates of goods price elasticity are significantly above unity in all but two cases. These findings, though in sharp contrast to most existing findings that report price elasticity of below unity, appear theoretically more plausible because nominal stock returns must exceed the inflation rate to insulate tax‐paying investors.

A note on the relationship between industry returns and inflation through a multiscaling approach

Many empirical studies investigate the Fisher hypothesis, which proposes a positive relationship between industry returns and inflation. The main contribution of this note is to put a new perspective on the relationship between industry returns and inflation in terms of the correlation, and the hedge ratio using wavelet analysis. Wavelets are treated as a “lens” that enables the researcher to explore relationships that previously were unobservable. Two important findings emerge. First, from the movements of wavelet correlation, overall, the correlation between industry returns and inflation does not decrease as the time horizon increases. Second, empirical results show that industry returns can be a hedge against inflation, depending on the particular industry.

Long-Run Relatinship Between Interest Rates and Inflation: An Error Correction Model

The extent to which movements in nominal interest rates change with anticipated inflation has been keenly researched ever since Fisher (1930) first pointed out that efficient capital markets should compensate for changes in the purchasing power of money. In the Indian context, this relationship was not given much focus until the beginning of 1990s due to the administered interest rate mechanism. Since the beginning of economic reforms and the liberalization of capital market, the interest rates were allowed to float, except the Bank Rate and the interest rate on savings deposits and the question of determining the interest rates became a big issue. Hence, this study examines the short-run and long run comovements of interest rates and inflation using cointegration analysis and error correction model. The results show that inflation causes 91-day Treasury bill yield and MIBOR indicating that the interest rates are now more market determined and there is evidence of Fisher's hypothesis.

Unresolved boundaries of evolutionary theory and the question of how inheritance systems evolve: 75 years of debate on the evolution of dominance

One of the key issues in the evolution of life is the evolution of inheritance systems. In population genetics, the earliest attempt at addressing the latter problem revolved around Fisher's theory on the evolution of dominance. Fisher's hypothesis was that inheritance systems could be modified during the evolutionary process in such a way that wild-type phenotypes could become dominant with respect to mutant phenotypes. This would result in the buffering of a population against the deleterious effects of mutations. The debate that ensued on this topic has been one of the most longstanding in evolutionary theory. At present, the prevalent view is that dominance cannot evolve as a direct result of selection. Furthermore, it has been argued that due to inherent constraints in biochemical systems, the manifestation of dominance is a default expectation and hence evolutionary explanations are not necessary. This has led to the position that the subject is generally resolved and no further debate is necessary. However, there are also several studies indicating that dominance levels can be modified as a result of changes in the genetic background. Furthermore, other studies have indicated that dominance selection is possible in certain circumstances. To a large degree, conclusions from both of the latter types of studies have been ignored. In this article, the history of several intellectual and methodological traditions that have contributed to this debate are traced, including experimental genetics, theoretical population genetics and theoretical biochemistry. In the light of both old and contemporary works on this topic, it is argued that contrary to the prevalent view, the evolution of dominance is not a resolved issue. A re-examination of this issue is essential, given that dominance evolution is likely to be an important stepping stone towards understanding the evolution of inheritance systems.

The genomic heritage of metastatic axillary lymph node tumors in breast cancer

9515 Background It remains unknown whether the primary mode of lymph node metastasis in breast cancer is sequential through the lymphatic chain, or if each node is individually seeded by the primary tumor (i.e. the Halsteadian versus Fisher hypothesis of tumor metastasis). Current theories vary and are based on a limited amount of clinical evidence without supportive molecular data. In this novel analysis, primary breast and metastatic axillary lymph node carcinomas were examined for global patterns of allelic imbalance (AI) to determine the timing and pattern of nodal metastatic tumor dispersion. Methods Patients enrolled in the Clinical Breast Care Project with node-positive breast cancer (n=25) involving multiple axillary lymph nodes (mean=4; range 2–7) were selected. DNA was extracted from pure populations of tumor cells obtained by laser capture microdissection. Referent DNA was obtained from blood or disease-free skin samples. A panel of 52 microsatellite markers from 26 commonly deleted regions in breast cancer was used to assess AI, which was determined by the peak height ratio (≤0.35) between alleles from tumor and referent samples. Student’s t-tests were performed to compare data sets, and global patterns of AI were investigated. Results A significantly higher level of AI was detected in the primary breast (36%) than the lymph node (26%) tumors (p<0.05). Across all chromosomal regions examined, AI was significantly more frequent in the breast primary, compared to metastatic lymph node tumors, at 3p14.1, 7q31.1-q31.31, 11p15, and 11q23.3 (p<0.05), with no regions showing significantly more AI in the lymph node metastases than in the breast primary tumors. Global clustering analysis investigating for similarities among the lymph nodes revealed a high variability in their patterns of AI, suggesting independent origins. Conclusion Multiple metastatic lymph node tumors from the same patient exhibit highly divergent patterns of AI. Primary breast carcinomas may acquire metastatic potential early in development and individual metastatic tumor cells that successfully metastasize to the axillary lymph nodes appear to originate primarily independent of each other from different cell lineages within the primary tumor. No significant financial relationships to disclose.

The Fisher hypothesis and the interaction between share returns, inflation and supply shocks

Recent tests reject the Fisher hypothesis even when expected income growth is accommodated in the estimates. This paper suggests that the coefficient of expected inflation is biased downwards when supply shock variables are omitted from standard tests of the Fisher hypothesis because they simultaneously affect inflation and real profits. Using data for 16 OECD countries over the past four decades, it is shown that the Fisher hypothesis cannot be rejected when supply shock variables are accommodated in the estimates.

Estimator Choice and Fisher's Paradox: A Monte Carlo Study

This paper argues that Fisher's paradox can be explained away in terms of estimator choice. We analyse by means of Monte Carlo experiments the small sample properties of a large set of estimators (including virtually all available single-equation estimators), and compute the critical values based on the empirical distributions of the t-statistics, for a variety of Data Generation Processes (DGPs), allowing for structural breaks, ARCH effects etc. We show that precisely the estimators most commonly used in the literature, namely OLS, Dynamic OLS (DOLS) and non-prewhitened FMLS, have the worst performance in small samples, and produce rejections of the Fisher hypothesis. If one employs the estimators with the most desirable properties (i.e., the smallest downward bias and the minimum shift in the distribution of the associated t-statistics), or if one uses the empirical critical values, the evidence based on US data is strongly supportive of the Fisher relation, consistently with many theoretical models.

The relationship between stock returns and inflation: new evidence from wavelet analysis

Abstract This paper presents a new perspective on the Fisher hypothesis, which states a positive relationship between nominal stock returns and inflation. The new approach is based on a wavelet multiscaling method that decomposes a given time series on a scale-by-scale basis. Empirical results show that there is a positive relationship between stock returns and inflation at the shortest scale (1-month period) and at the longest scale (128-month period), while a negative relationship is shown at the intermediate scales. This indicates that the nominal return results are supportive of the Fisher hypothesis for risky assets in d1 and s7 of the wavelet domain, while the stock returns do not play a role as an inflation hedge at the intermediate scales. The key empirical results show that time-scale decomposition provides a valuable means of testing the Fisher hypothesis, since a number of stock returns and inflation puzzles previously noted in the literature are resolved and explained by the wavelet analysis.

Understanding the Fisher equation

AbstractIt is argued that univariate long memory estimates based on ex post data tend to underestimate the persistence of ex ante variables (and, hence, that of the ex post variables themselves) because of the presence of unanticipated shocks whose short‐run volatility masks the degree of long‐range dependence in the data. Empirical estimates of long‐range dependence in the Fisher equation are shown to manifest this problem and lead to an apparent imbalance in the memory characteristics of the variables in the Fisher equation. Evidence in support of this typical underestimation is provided by results obtained with inflation forecast survey data and by direct calculation of the finite sample biases.To address the problem of bias, the paper introduces a bivariate exact Whittle (BEW) estimator that explicitly allows for the presence of short memory noise in the data. The new procedure enhances the empirical capacity to separate low‐frequency behaviour from high‐frequency fluctuations, and it produces estimates of long‐range dependence that are much less biased when there is noise contaminated data. Empirical estimates from the BEW method suggest that the three Fisher variables are integrated of the same order, with memory parameter in the range (0.75, 1). Since the integration orders are balanced, the ex ante real rate has the same degree of persistence as expected inflation, thereby furnishing evidence against the existence of a (fractional) cointegrating relation among the Fisher variables and, correspondingly, showing little support for a long‐run form of Fisher hypothesis. Copyright © 2004 John Wiley &amp; Sons, Ltd.

Trend breaks and the fisher hypothesis in canada and the United States

Using the sequential estimation methodology developed by Banerjee, Lumsdaine and Stock (Journal of Business and Economic Statistics, 10(3), 271–87, 1992), Zivot and Andrews (Journal of Business and Economic Statistics, 10(3), 251–70, 1992) and extended by Lumsdaine and Papell (Review of Economics and Statistics, 79(2), 212–18, 1997), empirical evidence is found consistent with the hypothesis that the 90-day Treasury Bill rate and the inflation rate in Canada and the US are stationary around a deterministic trend with two breaks. When the breaks are filtered out, the data is consistent with partial long-run adjustment of the nominal interest rate to an inflation shock, but not of the size predicted by the Fisher Effect.

The nominal theory of interest under habit formation: evidence for the U.S., 1959–2002

This paper shows that the debt-to-money ratio and inflation affect the nominal interest rate in a three-period overlapping generations (OG) model with habit formation. Employing monthly U.S. data from 1959:1 to 2002:2, we find a strong and robust relationship for the rate of inflation in the long-run vector. The debt-to-money ratio (inflation rate) is negatively (positively) related to the interest rate in postwar U.S. data, consistent with habit formation and with the Fisher hypothesis, respectively. Vector autoregressions (VARs) suggest similar negative responses of interest rates to shocks in the debt-to-money ratio.

Central Bank's interventions and the Fisher hypothesis: a threshold cointegration investigation

The long-run relationship between nominal interest rates and inflation is examined, allowing for structural breaks and asymmetric mean reversion. From a Threshold AutoRegressive (TAR) test applied to the residuals of the cointegration relationship (while allowing for both a break in the mean of the long-run equation and a smooth regime-transition), there is strong evidence for non-linear mean reversion properties for the real interest rates of the US Treasury Bill market. This suggests asymmetric changes to inflation shocks in the Central Bank's reaction function. The existence of different regimes is consistent with some interpretations of the monetary policies run by the Fed, such as credibility and opportunism.

Central Bank's interventions and the Fisher hypothesis: a threshold cointegration investigation

Central Bank's interventions and the Fisher hypothesis: a threshold cointegration investigation

Natural Selection and Molecular Evolution in PTC, a Bitter-Taste Receptor Gene

The ability to taste phenylthiocarbamide (PTC) is a classic phenotype that has long been known to vary in human populations. This phenotype is of genetic, epidemiologic, and evolutionary interest because the ability to taste PTC is correlated with the ability to taste other bitter substances, many of which are toxic. Thus, variation in PTC perception may reflect variation in dietary preferences throughout human history and could correlate with susceptibility to diet-related diseases in modern populations. To test R. A. Fisher's long-standing hypothesis that variability in PTC perception has been maintained by balancing natural selection, we examined patterns of DNA sequence variation in the recently identified PTC gene, which accounts for up to 85% of phenotypic variance in the trait. We analyzed the entire coding region of PTC (1,002 bp) in a sample of 330 chromosomes collected from African (n=62), Asian (n=138), European (n=110), and North American (n=20) populations by use of new statistical tests for natural selection that take into account the potentially confounding effects of human population growth. Two intermediate-frequency haplotypes corresponding to "taster" and "nontaster" phenotypes were found. These haplotypes had similar frequencies across Africa, Asia, and Europe. Genetic differentiation between the continental population samples was low (FST=0.056) in comparison with estimates based on other genes. In addition, Tajima's D and Fu and Li's D and F statistics demonstrated a significant deviation from neutrality because of an excess of intermediate-frequency variants when human population growth was taken into account (P<.01). These results combine to suggest that balancing natural selection has acted to maintain "taster" and "nontaster" alleles at the PTC locus in humans.

The generalized Fisher hypothesis in the Asian markets

This paper investigates the generalized Fisher hypothesis for nine equity markets in the Asian countries. It states that the real rates of return on common stocks and the expected inflation rate are independent and that nominal stock returns vary in a one‐to‐one correspondence with the expected inflation rate. The regression results indicate that stock returns in general are negatively correlated to both expected and unexpected inflation, and that common stocks provide a poor hedge against inflation. However, the results of the VAR model indicate the lack of a unidirectional causality between stock returns and inflation. It also fails to find a consistent negative response neither of inflation to shocks in stock returns nor of stock returns to shocks in inflation in all countries. It appears that the generalized Fisher hypothesis in the Asian markets is as puzzling as in the developed markets.

Fisher hypothesis: UK evidence over a century

Using annual data over a long time horizon from 1900 to 2000 for the UK, this study finds the existence of a Fisher relation via Johansen cointegration tests. The cointegrating relationship between the two variables suggests a significant long-run equilibrium with a positive coefficient of more than one during the stated period.

Evolving Inflation Dynamics, Monetary Policy, and The Fisher Hypothesis

This paper empirically investigates the Fisher relation between expected inflation and the ex ante real interest rate. We demonstrate that inflation dynamics are empirically characterized by regime shifts as well as stochastic volatility. The Fisher relation itself shifted with the Volcker experiment. The negative Fisher relation documented by Fama and Gibbons (1982) and others is specifi ct o data drawn from the late 1960s to the late 1970s. Subsequently, the Fisher relation becomes significantly positive. The dynamic properties of inflation and nominal short rates also shift with the Volcker experiment. These shifts reflect a change in the systematic conduct of monetary policy embodied in the Taylor rule wherein the Fed aggresively uses interest rates to stabilize inflation.

Testing Fisher hypothesis in long horizons for G7 and eight Asian countries.1

Using monthly data from G7 and eight Asian countries, support is found for the Fisher hypothesis, as well as a positive relation between long-horizon nominal stock returns and expected inflation but not between long-horizon nominal stock returns and contemporaneous inflation. These empirical results complement and strengthen those of Boudoukh and Richardson. 1 The MATLAB program and data to compute the results in this paper are available from http://kafuwong.econ.hku.hk/research/fisher/.

THE FISHER EFFECT: A SURVEY

The Fisher hypothesis has been a much debated topic. Over the years the hypothesis debated and the techniques used have changed. While the majority of early studies on the Fisher effect concentrated primarily on confirming the long and distributed lag in expectations formation, subsequent work saw the integration of the Fisher hypothesis with the theories of rational expectations and efficient markets. With the incorporation of these theories in the Fisher hypothesis, the methodological advances involved examining the time series properties of the variables in question. This survey reviews previous work from this perspective. In addition, the studies pertaining to developing economies and possible explanations for the failure of the Fisher effect are also reviewed.