CAPITULO III: FORMAS DE DEFENSA DEL CONSUMIDOR RESULTADOS DE LA INVESTIGACIÓN
EL CONCEPTO DE CONSUMIDOR ANÁLISIS DE SUS NOCIONES ABSTRACTA Y CONCRETA.
The Fisher (1930) hypothesis, also known as the Fisher effect, (hereafter used interchangeably) states that real interest rates depend on nominal rates and inflation such that nominal rates less inflation result in real interest rates. According to Fama and Schwert (1977), this association holds in an efficient market, and can be effectively applied to all assets, including stocks, such that expected nominal return on stocks is the sum of expected real return and expected inflation. In this regard, a rise in expected inflation ceteris paribus would result in a rise in
nominal returns in an efficient market where prices reflect current and future levels of inflation; hence the notion that stock returns and inflation move in the same direction. Nelson (1976), Fama and Schwert (1977), and Choudhry (2001) provide a summary analysis of the Fisher hypothesis through an application of this approach on the stock market. The analysis starts by looking at ex ante real stock returns which are the forecast level returns and are the difference between the expected nominal return on stocks and expected inflation given current information. Equation 3.1 presents this as follows:
) ( ) ( 1 1 t t t t t E R l E l r 3.1 Where rt is the ex ante real return on stocks, Rt is the nominal rate of return, t is inflation,
E is the mathematical expectations operator and lt1 is the information available, a lag before
t. Equation 3.1 is one way of determining ex ante real return on stock; another way of
expressing these returns is in terms of average return and the variable part of the returns thus:
t t r r r _ 3.2
where ris the average return and rt is the variable part from the average return to the real
return. If Equation 3.1 and 3.2 are then brought together, the resulting expression or equation would be: t t t t t t E R l E l r r r ( 1) ( 1) 3.3 thus, E(Rtlt1)E(tlt1)rrt 3.4
Taking E(t lt1) to the other side of the equation, the simplified result will be Equation 3.5:
t t t t tl E l r r R E( 1) ( 1) 3.5
On the other hand, actual real rate of return can also be expressed in terms of expected values and prediction errors as follows:
t t t
t E R l
R ( 1) 3.6
where t is the prediction error for the real rate of return and is uncorrelated with the
predicted value of return. If E(Rtlt1) is made the subject of the formula, Equation 3.6 can
be rewritten as: t t t tl R R E( 1) 3.7
Similarly and using the concept contained in Equation 3.6, actual inflation rate can be expressed in terms of expected values and prediction errors as follows:
t t t
t E l
( 1) 3.8
where t is the prediction error for the inflation rate and is uncorrelated with the predicted
value. If t is moved to the left–hand side of Equation 3.8, the expression can be rewritten
and rearranged as:
t t t
t l
E( 1) 3.9 Bringing Equations 3.5 and 3.7 together using the common variableE(Rtlt1), the following simplification will result in Equation 3.12:
t t t t t t tl R E l r r R E( 1) ( 1) 3.10 thus Rt E(t lt1)rrt t 3.11 and, Rt rE(tlt1)t 3.12
where t rt t and according to the Fisher effect the coefficient is unity. This is the
Fisher effect equation which Fama and Schwert (1977) went on to prove was not supported by empirical data. Their findings were that expected inflation and real return do not move one on one, nor do unexpected inflation and stock returns. If Equation 3.12 is further broken down by bringing in Equation 3.9 to remove the expectation component from the inflation expression, the result will be the following equation:
t t
t r
R , wheret t t 3.13
The above expression with as unity suggests that inflation and stock returns have a positive
relationship; thus stocks maintain their value in the face of a rise in the inflation rate. Nelson
(1976) notes that the properties of the compound disturbances that make up t will determine
the properties of the least squares estimator of r and , while there is a positive relationship
between the inflation rate and its prediction errors (). In addition, Choudhry (2001) points
out that the relationship between inflation rate and the stock market prediction errors will
depend on the correlation between t and t, and argues that the two will be correlated if
stock prices react systematically to new information about inflation.
The assumption that is unity and positive is based on the classical theory which Lintner
(1974) attributes to both Fisher (1930) and Williams (1938). In the classical theory there is presupposition that real returns to stock prices will be invariant to the inflation rate, since the returns depend fundamentally upon production functions and input and output relations as well as factors which are invariant to the general price level (Lintner, 1974). The implication of this relationship, therefore, is that the present value of the flows in real returns and real
capitalisation is unaffected by general price movements either expected or current. Lintner (1974) thus notes that the invariance of real values means current money values will vary in direct proportion to inflation, making nominal capital gains on unlevered equity equal to the
rate of inflation; thus in Equation 3.12 is assumed to be unity and positive.
Fraser (1993) supports this belief in economic theory by looking at the relationship between income, inflation, turnover, costs and profits. He says rising real incomes mean that firms face rising demand for goods and services, enabling them to recover increased costs by raising their prices. If the demand for goods and services do increase, this in turn results in an increase in turnover, which would eventually translate to an increase in profits for the firm. Since share price is directly affected by movements in achieved profit, then the turnover increase would result in share movement and, if this increase is more than what was achieved in the previous period, then a positive relationship between inflation and share price would be achieved. Fraser argues that in the 1950s and early 1960s, inflation seemed to be caused predominantly by ‘demand–pull’ pressures, whereby rising demand for goods and services enabled firms to raise prices and make higher profits. An initial reaction to this analysis is that it assumes that cost of providing services and producing goods was static. However, Fraser acknowledges the effect of costs by pointing out that “…costs rose as well, particularly wages, but wage rises tended to follow the price rises and, in times of rising demand, cost increases could be recovered by further price increases and increased efficiency of production.” (Fraser, 1993, p. 94).
The theoretic reasoning offered above will not adequately explain the relationship in the face of cost–push inflation, but will be supported by the monetarist view of the causes of inflation.
Inflation driven by cost–push factors, especially those which are not wage related, may induce a reduction in profit margin to ensure company goods and services remain competitive and affordable. Such decrease in profits will eventually bring down company share prices; thus a negative relationship between inflation and stocks will be achieved in this case. Since the competitive nature of industry in the production and provision of services has evolved from monopolistic tendencies of the past to supplier diversity, the notion of keeping prices competitive and affordable is modern; thus Fraser’s assessment can be considered appropriate for the period and conditions at play then.
The Fisher Effect, which is rooted in economic theory, reflects the classical economist’s concentration on long–run comparative static equilibrium denominated in real terms of exchange, independent of current levels of money prices which depend on actions of monetary authorities by way of the classical Quantitative Theory of Money (Lintner, 1974). The long–run justification of the Fisher effect is empirically proved by Boudoukh and Richardson (1993), who found the relationship between stocks and inflation to be positive using UK and USA data from 1802 to 1990. Their study also confirmed that while the Fisher hypothesis is based on ex ante stock returns, ex post returns can also be interpreted in the same way. The UK empirical evidence on the relationship between stocks and inflation, as noted in Gultekin’s (1983) research on different international stock markets, has predominantly been positive. Thus, the interesting component of the research by Boudoukh and Richardson (1993) is the empirical evidence from the USA, which was found to be negative by Fama (1981) and the rest of the Proxy hypothesis empirical researchers.
Ely and Robinson (1997) carried out research on sixteen industrialised countries, and their results indicated that stocks do maintain value relative to movements in inflation and, like Boudoukh and Richardson (1993), they argued that the evidence of a negative relationship is based on the use of models that do not capture long–run relationships. Their conclusions also found that the relationship does not depend on the source of the inflation, whether it comes from real or monetary sources. These findings are contrary to empirical work done prior to their research, which suggested that the relationship might depend on the source of the inflation. Using the vector correction models to account for long–term relationships, the relationship is confirmed as positive. This conclusion raises the question of whether the number of years considered in the analysis of this relationship is important.
Anari and Kolari (2001) used stock prices and inflation data in six industrialised countries, pointing out that the time path of the response of stock prices to a shock in goods exhibits an initial negative response which turns positive over long horizons. In addition, their research reveals that stocks have a long memory with respect to inflation shocks; thus they are a good inflation hedge over a long holding period. Lintner (1974) dismissed this notion of the length of data by pointing out that statistical analysis of data covering the first three quarters of the twentieth century uniformly shows that both nominal and real rates of return on stocks had been negatively and very significantly related to the inflation rate. The challenge with the analysis by Lintner is that it did not use techniques which capture long-run dynamics such as cointegration.
Apart from the influences of expected and current values of inflation, Choudhry (2001), who used stochastic structural tests, found that past inflation levels have a bearing on current stock price changes. This is a departure from the above economic theory and empirical work whose interests focused primarily on expected and current inflation level; thus the relationship and indeed the significance of inflation to stock market prices is cemented. Choudhry (2001) made these findings when he looked at the relationship between inflation and stock returns in four high–inflation Latin and Central American countries and concluded that there is a positive relationship between the two variables. His conclusion is in unison with Ely and Robinson’s (1997) finding that inflation moves in the same direction as stock market prices, but more important for investors is the fact that stocks are a good hedge against inflation, and hence a retention of value. Henry (2002), who worked on twenty one predominantly emerging markets that experienced disinflation, states that the stock market appreciates by an average of 24% in real dollar terms when countries attempt to stabilise high annual inflation rates of more than 40%. Choudhry’s conclusions, (2001) though, bring out the issue of inflation rate announcement dates. Thus the one-month lag relationship could be an indication that using month–end results to ascertain the relationship could be questioned.
To counter the notion that the positive relationship between inflation and stocks is sector based, given that Lintner (1974) and Fraser (1993) use predominantly the production sector to infer on the relationship, Luintel and Paudyal (2006) looked at the relationship from the cross sector angle. They tested whether UK common stocks hedge against inflation using a framework of the tax–augmented Fisher hypothesis. The cointegration analysis was used on seven industry groups and monthly data covering forty–eight 48 years, and the results showed
that point estimates of the goods elasticity were significant above unity in five of the sectors. The exceptions in this case were the mineral extraction industry, which showed below unity price elasticity, and investment trusts, which showed unity elasticity. This inflation hedge paradigm is supported by Anari and Kolari (2001) who showed that long-run Fisher elasticity of stock prices with respect to inflation exceed unity and range from 1.04 to 1.65 in the following countries: UK, USA, Canada and Japan. Luintel and Paudyal (2006) noted that their results were plausible because nominal returns from stock investment must exceed inflation rate to fully insulate tax–paying investors, failure to which real wealth losses will be realised.