Inflation Uncertain, Economic Growth and Stock Return: Testing by the Arch Model

Inflation uncertain, economic growth and stock return: testing by the ARCH model

Wei Ping

10004258

2/05/2012

Introduction

The correlation between inflation uncertainty and economic growth or stock return is being considered and studied as a prediction’s measure of stock return in recent years. Specially, previous researchers point out that there is a negative relationship between inflation uncertainty and economic growth or stock return. Economic theory highlights that inflation uncertainty causes a negative impact on economic growth. Other theories debate this topic as well. Consequently, this project uses autoregressive conditional heterosedastic (ARCH) model to certify whether inflation uncertainty has a negative upon economic growth or stock return or not.

This project is divided into five parts. The first part introduces topic. Then, it presents others authors’ perspective about this project. Furthermore, it states research question. The next, it interprets why correlation between inflation uncertainty and economic growth or stock return is chosen. Finally, it will simply explain where this project obtains the data.

Brief literature review

By using various approaches of measuringinflation uncertainty, some authors find some evidences to support this project. Likely, Berument(1999) states that there is a negative relationship between inflation uncertainty and economic growth. Buono (1989) also find evidence that there is a negative correlation between inflation uncertainty and stock return with ARCH equation. Hamzah (2011) proposes that aim of policy in govermetn reduces risk of inflation uncertainty and promote the development of economy. Thus, Hamzah (2011) points out that a steady economic growth could be favor for governments because it could stimulate economic growth.

Research question

This project adopts autoregressive conditional heteroscedastic(ARCH) model to measure the relationship between inflation...