Investing long-run relationships in the stock market.

Abstract

This thesis examines the inflation hedging ability of U.S. individual stocks. We use daily U.S. CPI and stock prices from S&P 500 benchmark index for the period August 2008 to August 2015. We construct portfolios based on long-run (Q1 and Q2) and short-run (Q3 and Q4) relationships of stock prices with respect to the US consumer prices and examine their inflation hedging ability. The empirical results suggest that portfolios with stocks which have shown a significant cointegration relationship have better inflation hedging abilities. Furthermore, the four factor model of Fama and French shows that the best inflation hedgers tend to be growth stocks. Sectoral analysis of the S&P 500 index reveals that stocks which outperform inflation tend to be drawn from Industrial sector.