STOCKS HEDGE AGAINST INFLATION IN THE LONG RUN: EVIDENCE FROM A COIN- TEGRATION ANALYSIS FOR DENMARK

We suggest an alternative approach to testing whether stocks provide a hedge against <p> inflation in the long run. Based on a simple structural model, we test the hedge hypothesis in <p> terms of the long-run linkage between stock prices and the general price level, as estimated <p> by cointegration analysis. Using data for the Danish stock market over the post-World War <p> II-period, results give strong support for the hedge property, defined in the narrow sense of <p> a perfect hedge. This contrasts with the weak support found in the literature and also <p> represents stronger support than produced by standard methods. We argue that our <p> approach has the advantage of allowing for a clear distinction between short- and long-run <p> dynamics of stock prices which adjust slowly to long-run equilibrium.