Equities as an Effective Hedge against Inflation: Empirical Evidence from Pakistan

Abstract

The inflation stance of world economy has changed significantly and many of the investors now believe that there may be further spike in inflation in medium term. Capital markets serve as a medium to help mobiles the funds from one hand to another and aid in production of more goods and services. Due to political instability, spiking inflation and uncertain climate due to war on terrorism and other security issues, financial markets are not being able to get investors' trust resulting in lack of investment. Inflation which is measured by consumer price index (CPI) shows the overall upward movement in prices of goods and services. The rising prices in response to general inflation can protect investors by increasing the value of stocks in the equity market without affecting their real return. Pakistani economy largely remained impervious to the global financial crisis due to lower exposures to international finance faced multifaceted challenges on external and internal fronts mainly campaign against terrorism, unstable law and order situation, lingering energy shortages and non-materialization of external inflows. This work is limited to developed economies and less work has been done in the developing economies. In this way; this study will contribute valuable insight regarding this relationship in the Pakistani context.