Using the informational sufficiency procedure from Forni and Gambetti (2014) along with data from McCracken and Ng (2014), we update the results of Lee (1992) and find that his Vector Autoregression (VAR) is informationally deficient. To correct this problem, we estimate a Factor Augmented VAR (FAVAR) and analyze the differences once informational deficiency is corrected with an emphasis on the relationship between real stock returns and inflation. In particular, we examine Modigliani and Cohn’s (1979) inflation illusion hypothesis, Fama’s (1983) proxy hypothesis, and the “anticipated policy hypothesis.”
Published inThe Financial Review
CitationJONES, P.M., OLSON, E. and WOHAR, M.E., 2017. A reexamination of real stock returns, real interest rates, real activity, and inflation: Evidence from a large data set. The Financial Review, 52(3), pp. 405–433.
Publisher© The Eastern Finance Association. Published by Wiley.
VersionAM (Accepted Manuscript)
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NotesThis is the peer reviewed version of the following article: JONES, P.M., OLSON, E. and WOHAR, M.E., 2017. A reexamination of real stock returns, real interest rates, real activity, and inflation: Evidence from a large data set. The Financial Review, 52(3), pp. 405–433, which has been published in final form at https://doi.org/10.1111/fire.12137. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Use of Self-Archived Versions.