Review of Financial Economics 24 (2015) 1217

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Review of Financial Economics

journal homepage: www.elsevier.com/locate/rfe

Are equities good ination hedges? A frequency domain perspective

Cetin Ciner
Department of Economics and Finance, Cameron School of Business, University of North Carolina Wilmington, Wilmington, NC 28403, United States

a r t i c l e

i n f o

Article history:
Received 28 April 2014
Received in revised form 5 December 2014
Accepted 10 December 2014
Available online 17 December 2014
JEL classication:
GO
G1

a b s t r a c t
By using industry level data, we examine the relation between equity returns and ination in a frequency dependent framework. Our analysis shows that a positive relation in fact exists between equity returns and high frequency ination shocks for commodity and technology related industries. Since higher frequency shocks are
independent from trend and are transitory in nature, our ndings imply a positive relation between stock returns
and the unexpected component of ination. Furthermore, we show that the results are robust to rm-level data
by using a sample from the oil industry. Hence, our study provides a new look at the impact of ination on equities by showing the sensitivity of conclusions in prior work to frequency dependence in data.
2014 Elsevier Inc. All rights reserved.

Keywords:
Ination
Stock returns
Frequency domain

1. Introduction
The relation between ination and equity prices, motivated by the
Fisher hypothesis, is one of the most frequently investigated topics in
nance and economics. The underlying intuition of this hypothesis is
that stocks represent claims on real assets and therefore, their valuations should increase with ination. Thus, a positive relation is predicted
between ination and stock price movements, in which case it can be
argued that equities provide a good hedge against the ination risk.
Unfortunately, empirical studies, beginning with the early work
of Bodie (1976) and Fama and Schwert (1977), consistently report a
negative correlation between stock returns and ination. Ang et al.
(2011) and Hagmann and Lenz (2004) are examples of more recent
papers that reach similar conclusions. One of the explanations offered
for this counter-intuitive nding is the proxy hypothesis of Fama
(1981) and Kaul (1987). The argument of these authors is that the
documented negative correlation with ination is spurious. It arises
because the stock market anticipates the negative impact of higher
ination on growth, which lowers the market valuations.1

I am grateful to Richard Ashley for providing the code to conduct the frequency
domain decomposition used in this paper. Comments provided by an anonymous referee
signicantly improved the paper. All remaining errors are mine.
Tel.: +1 910 962 7497.
E-mail address: cinerc@uncw.edu.
1
Geske and Roll (1983) and Pearce and Roley (1988) provide discussions of alternative
hypotheses on the negative correlation between ination and stock returns.

http://dx.doi.org/10.1016/j.rfe.2014.12.001
1058-3300/ 2014 Elsevier Inc. All rights reserved.

In this paper our objective is to provide a further examination of

the relation between stock returns and ination by using a recently
developed frequency domain decomposition method by Ashley and
Verbrugge (2009). The principal advantage of this method is to allow
us to examine whether there is persistency dependence in the stock
return-ination linkage, which could occur if higher and lower frequency inationary shocks have different effects on stock price movements.2
We argue that differential effects of expected and unexpected inationary shocks on stock valuations can be investigated by utilizing this
method of analysis.
Specically, lower frequency shocks are those that tend to be persistent and are likely to represent a continuation of the trend in ination.
Thus, at least to some extent, these shocks can be anticipated by market
participants. Higher frequency shocks, on the other hand, are those with
less persistence and are, therefore, transitory in nature. These shocks are
difcult to forecast by denition and hence, represent the unexpected
component of ination. Hence, our empirical method provides a novel
approach to dene unexpected ination as those corresponding to
higher frequencies on the spectra. Our primary hypothesis is that if
equities are good ination hedges then we should expect a positive
relation between stock returns and unexpected ination.
Many studies in prior work have also examined the stock return
ination linkage by obtaining proxies for expected and unexpected
2
While there are other frequency decomposition methods suggested in the literature,
the AshleyVerbrugge approach is unique because it is robust to feedback between the
variables as discussed further below. In other words, it continues to be valid even when
there is causality from equities to ination, which is plausible under the present value
models of asset prices.

C. Ciner / Review of Financial Economics 24 (2015) 1217

inationary shocks. For example, Fama and Schwert (1977) use changes
in the short term interest rate to infer the expected ination. Bodie
(1976) relies on ARIMA models to construct proxies for expected ination. Hagmann and Lenz (2004) and Hess and Lee (1999) use vector
autoregression (VAR) models to decompose ination into expected
and unexpected components. In related work, McQueen and Roley
(1993) and Pearce and Roley (1988) rely on forecasts by Money Market
Services International to identify the surprise element in ination announcements. More recently, Wei (2009) uses a time series regression
model that also includes lagged values of monthly unemployment rate
to estimate the unexpected component of ination. These studies in
general support the conclusion of earlier papers that the relation
between stock returns and unexpected ination is also negative.
Furthermore, in papers closely related to the present article, Lee and
Ni (1996) use the Chebyshev lter to obtain estimates of unexpected
ination as the transitory component of inationary shocks. These
authors argue that there are differences in the relation between stock
returns and ination based on the frequency components of ination.
Kim and In (2006) rely on a multi-scale wavelet decomposition
approach to examine the same relation. Interestingly, they detect a
positive relation between ination and stock returns at the shortest
scale, which corresponds to the highest frequency shocks. We provide
a further discussion in the following section on why we have preferred
the AshleyVerbrugge decomposition in the present paper rather than
the abovementioned method of analyses.3
We also examine the stock returnination relation by relying on
industry portfolios. This permits us to determine whether some sectors
of the stock market may be considered better hedges against ination.
For example, Boudoukh et al. (1994) argue that non-cyclical stocks tend
to be more positively correlated with ination than cyclical stocks. Stocks
of natural resource companies are usually considered as better ination
hedges because of the sensitivity of commodity prices to ination. In the
empirical analysis, therefore, we rst calculate the conventional ination
betas using 48 industry portfolios by estimating conventional stock
returnination regressions. Our data cover the period between 1990
and 2013 and hence, a further contribution of our analysis is to update
evidence in the literature for a more recent period. Consistent with
prior work, we nd that, in general, ination betas are negative.
Subsequently, we estimate the same model by replacing ination
with its frequency components obtained by the Ashley and Verbrugge
(2009) decomposition. The results of this analysis lend support to
the central claim of the paper, which is that the stock returnination
relation shows dependency on the persistence of inationary shocks.
Specically, we nd that while long term, trend shocks, replicate the
negative ination betas obtained above as expected, ination betas
for unexpected (high frequency) shocks are in fact positive for 18 industry portfolios. These positive unexpected ination betas exist in
commodity-sensitive (such as coal, mines, oil, gold and agricultural)
and technology-related industries (such as telecoms, software and
chips) among others.
The rst part of the empirical analysis utilizes value-weighted industry portfolios and hence, could simply be an artifact of data, since larger
companies dominate value-weighted indices. To investigate the robustness of the ndings to rm size, we conduct the analysis by using
equally-weighted industry portfolios. We nd largely similar results.
Again, unexpected ination betas for commodity-sensitive industries
(gold, mines and oil) as well as technology-related industries (telecom,
hardware and chips) have positive, and statistically signicant, unexpected ination betas.
In the next section, we outline the statistical method of analysis used
in the paper. In Section 3, we present the data set, and discuss the
empirical ndings in Section 4. We provide the concluding comments
of the paper in the nal section of the study.

We thank an anonymous referee for recommending this discussion.

13

2. Statistical method of analysis

Conventional time domain regressions are linear and force a xed
coefcient to describe the relation between the variables that is supposed to be constant at all frequencies. For instance, in the context of
our paper, the conventional regression analysis suggests that the sensitivity of industry portfolio returns to transitory (high frequency) shocks
in ination is exactly the same as it is to permanent (low frequency)
shocks. However, there is no a priori reason to expect this to always obtain and researchers have long recognized that estimating a frequency
dependent regression model, in which the coefcient is permitted to
vary over time, is likely to yield richer dynamics. Early research by
Hannan (1963) and Engle (1974), further developed by Tan and
Ashley (1999), suggests to transform the time series regressions into
frequency domain by means of spectral regression models. For example,
consider the following generalized linear regression model:



2
Y X ;  N 0; j

in which Y is T 1 and X is T K. The objective of the approach is to

transform the equation in such a manner that the components of the
variables correspond to frequencies rather than time periods. This is accomplished by pre-multiplying the regression by a T T matrix A,
whose (s,t)th element is given by

As;t

8 
>
1 1=2
>
>
; for s 1;
>
>
T
>
>


>  1=2
>
>
2
st1
>
>
;
for s 2; 4; 6; ; T2orT1
cos
< T
T


 1
>
2 2
s1t1
>
>
;
for s 3; 5; 7; ; T1or T;
sin
>
>
T
T
>
>
>
 1
>
>
2
1
t1
>
>
1 ;
for s T when T is even
:
T

AY AX A
A is an orthogonal matrix and the pre-multiplication gives:





 
2
Y X ;  n 0; I :

In Eq. (2), the components of the variables now represent frequencies instead of time periods. Next, the T frequency components are
partitioned into M frequency bands and dummy variables are created
to dene M vectors of length T, which can be written as D1, .. DM.
These dummy variables are used in a manner that for elements, which
fall into the sth frequency band, Ds equals Xj and the elements are
zero otherwise. Consequently, the regression equation can be rewritten
as follows:


Y X f jg f jg m1 j;m D

m

in which X{j} is the X* with its jth column deleted and {j} is the vector
with its jth component deleted. Hence, frequency-dependent coefcients j,1 .. j,M can be estimated and hypotheses tests can be
conducted on the signicance of these parameters.
However, Ashley and Verbrugge (2009) argue that an important
weakness exists in the above approach. In particular, since premultiplying with matrix A mixes past and futures values of the variables,
the M frequency components will be correlated with the error terms, if
there is feedback between the dependent and any of the independent
variables, which is likely in nance and economics data. This would
yield inconsistent estimates if the partitioned frequency components
are used in an OLS regression.
The main contribution of Ashley and Verbrugge (2009) is that they
present a solution to this problem by applying a one-sided, rather

14

C. Ciner / Review of Financial Economics 24 (2015) 1217

than a two-sided bandpass lter. In essence, they suggest decomposing

Xj into frequency components by applying the same transformation
above in a moving M-month window and keeping only the most recent
value. They show that this transformation effectively resolves estimation
problems due to possible feedback. In this manner, with an M-month
window, parameters on all frequencies can be estimated without any a
priori selection of frequency bands. In this approach, the selection of the
M-month window also signies the longest persistency that will be considered. That is because shocks with greater than M-month persistency
are considered long term trend shocks and are lumped together at zero
frequency.
In the present paper, we consider a 36-month window, which implies that all temporary inationary movements should dissipate in
36-months. The AshleyVerbrugge decomposition approach has been
used in several recent papers in the literature. Both Ashley and Tsang
(2013) and Yanfeng (2013) examine the frequency dependence in oil
priceeconomic output relation. Ashley et al. (2011) use this method
of analysis to examine the Taylor rule in monetary policy. Ciner
(2014) relies on this approach to examine the relation between consumer sentiment and stock return, while Ciner (2013) focuses on sensitivity of the oil pricestock return relation to frequency of shocks.
Also, as mentioned in the Introduction, our paper is closely related to
Lee and Ni (1996), who use the Chebyshev lter, and to Kim and In
(2006), who use the wavelet theory, to similarly decompose ination
into its high and low frequency components. Thus, it is important to
highlight why the AshleyVerbrugge approach is preferred in the present
study. In regards to the wavelet theory used by Kim and In (2006), while
their approach is helpful in understanding time variation in a regression it
is largely because a new wavelet is needed in every time period. On the
other hand, there is a major disadvantage associated with this methodology because there is not one set of wavelets, rather a number of wavelet
families that a researcher has to choose from. As a consequence, it is difcult to interpret regression coefcients when the wavelet decomposition is used. This is perhaps the most important advantage of the
AshleyVerbrugge approach over the wavelet analysis. The estimated
coefcients can be easily interpreted in the AshleyVerbrugge method
as reecting the persistency of shocks in dependent variables.4
In regards to the Chebyshev lter used by Lee and Ni (1996), it
should be mentioned that their analysis is a novel econometric
approach and is consistent with the key points of the AshleyVerbrugge
decomposition method. First, the Chebyshev lter also uses only past
values of input series; hence, when the decomposed parts are used in
a regression, coefcients will not suffer from simultaneity bias if there
is feedback between the variables. Secondly, the estimated coefcients
have economically meaningful interpretations again similar to the
AshleyVerbrugge approach. On the other hand, Chebyshev lters do
have an important disadvantage over spectral lters in that leakage in
the lter is unavoidable since they are time domain based, which causes
phase and amplitude distortions, and consequently, results will not be
as precise as those from a spectral lter.
Finally, one could also use a time series model, such as a VAR or an
ARMA model, to conduct the ltering exercise. However, these models
cannot be constructed with specic cutoff points determined by the researcher and hence, the frequency of the resulting ltered series will not
be known. Again, this would make the economic interpretation of the
regression results using the ltered series rather difcult. A secondary
problem with this approach is that the true forecasting model is never
known making researchers likely to use different time series models
for expected ination, giving rise to different conclusions. Note the
separate models in Hagmann and Lenz (2004) and Wei (2009) as an
example of this point. The AshleyVerbrugge approach denes expected versus unexpected inationary shocks as a measure of persistency
and hence, avoids determining the correct forecasting model.

We thank Richard Ashley for providing this information in private conversation.

3. Data
The data used in our study include the CPI, measured as a monthly
series of annual percentage change in headline ination, and the
monthly returns on 48 stock industry portfolios. The series span the
period between January of 1990 and December of 2012.5 The ination
series are obtained from the Fred database at the St. Louis Federal
Reserve and the industry stock returns are found on Kenneth French's
website. Table 1 provides the summary statistics of monthly stock
returns. It can be observed that the returns are positive and statistically
signicantly indifferent from zero, consistent with the view that stock
prices are a submartingale process. We also detect negative skewness
and excess kurtosis in returns similar to prior work.
As mentioned in the Introduction, the essential part of the empirical
analysis of this study involves decomposing the ination rate into its
frequency components using the AshleyVerbrugge approach. The
36-month window used in the application decomposes the ination
rate into 19 frequency components including the zero frequency. We
could estimate the stock returnination regressions by substituting
the ination variable by its 19 frequency components. However, this
would involve a substantial loss in degrees of freedom and, also, different ndings across individual frequencies could make interpreting the
results difcult. Therefore, we generate four new groups from the
frequency components that have intuitive motivations.
Specically, we create four new variables by regrouping the frequency
components as follows:
Long

Medium1

Medium2

Short

N36-months 12-months 36-months 3-months b 12-months b3-months

In this specication, Long represents the trend in ination as the

component with the greatest persistency. Medium1 represents inationary shocks with persistency between 12- and 36-months, while Medium2 consists of shocks with persistency between 3- and 12-months.
And nally, Short stands for the highest frequency component of ination. These are shocks with persistency of less than 3-months and
hence, by denition represent the most transitory components of
ination changes.
Recall that, by construction, the sum of these variables equals the
original ination variable and can therefore be used in regressions to
replace the ination rate to test for frequency dependence in the stock
returnination dynamic. The determination of the frequency bands
to regroup the variables discussed above can be considered somewhat
arbitrary. However, our approach relies on the intuition that the highest
frequency shocks constitute the most transitory and unexpected component of ination. For that reason, Short is constructed to include
only shocks with persistency between 2- and 3-months, which is the
primary variable of interest in the paper.
In Figs. 15 we provide graphs of these new variables. An examination of the ination components suggests that the AshleyVerbrugge
approach achieves a decomposition of the aggregate ination consistent
with our expectations. The trend in ination, captured by Long, closely
replicates the ination rate, which is expected because a majority of
changes in monthly ination rate are simply a continuation of the long
term trend in data, especially for highly persistent macroeconomic
data like the ination rate. At the other end of the spectrum, high
frequency shocks in ination, captured by Short, have much greater
volatility and do not resemble the overall ination series. This is also
expected because by construction these should be short term and
hence, unpredictable shocks, which should not have a smooth pattern.
5
As discussed above, the AshleyVerbrugge method to obtain the moving windows for
the 36-month trend frequency results in a loss of the rst 34 observations, hence the effective data cover the period between October of 1992 and December of 2012 for a total of
243 observations.

C. Ciner / Review of Financial Economics 24 (2015) 1217

15

Table 1
Summary statistics.
Industry

Mean

Std. dev.

Skewness

Kurtosis

Agric
Food
Soda
Beer
Smoke
Toys
Fun
Books
Hshld
Clths
Hlth
MedEq
Drugs
Chems
Rubbr
Txtls
BldMt
Cnstr
Steel
FabPr
Mach
ElcEq
Aero
Ships
Guns
Gold
Mines
Coal
Oil
Util
Telcm
Persv
Bussv
Hardw
Softw
Chips
LabEq
Paper
Boxes
Trans
Whlsl
Rtail
Meals
Banks
Insur
Real
Fin

1.14 (.00)
.74 (.00)
1.36 (.00)
.84 (.00)
1.22 (.00)
.47 (.24)
1.05 (.04)
.63 (.08)
.86 (.00)
.87 (.03)
.78 (.06)
.85 (.00)
.92 (.00)
.94 (.01)
.92 (.01)
.56 (.30)
.89 (.03)
1.08 (.01)
.78 (.17)
.48 (.36)
1.11 (.01)
1.25 (.00)
1.22 (.00)
1.42 (.00)
1.09 (.00)
.82 (.25)
1.16 (.02)
1.81 (.02)
1.07 (.00)
.77 (.00)
.68 (.05)
.61 (.12)
.72 (.03)
1.32 (.02)
1.18 (.01)
1.09 (.05)
.95 (.04)
.77 (.02)
.79 (.05)
.86 (.01)
.74 (.01)
.88 (.00)
.96 (.00)
.83 (.04)
.84 (.01)
.68 (.17)
1.14 (.01)

6.43
3.97
7.67
4.93
7.23
6.42
8.03
5.59
4.25
6.83
6.61
4.82
4.57
5.82
6.05
8.53
6.53
7.12
8.86
8.32
6.99
6.56
6.33
7.58
6.48
11.24
8.10
12.47
5.53
4.13
5.42
6.20
5.25
8.80
7.75
8.78
7.23
5.31
6.36
5.30
4.78
5.01
4.87
6.33
5.40
7.79
7.39

.52
.13
.24
.41
.14
.23
.23
.26
.39
.17
.33
.92
.15
.08
.06
1.14
.10
.38
.29
.07
.49
.31
.93
.11
.72
1.25
.50
.11
.04
.60
.23
.19
.69
.33
.01
.46
.28
.12
.39
.38
.65
.19
.42
.81
.69
.94
.49

1.84
1.68
3.59
2.03
2.38
1.19
3.57
4.70
2.34
1.86
1.04
2.23
.09
2.14
4.02
11.42
6.16
1.07
1.79
3.08
2.11
1.15
2.56
1.96
2.49
8.47
2.48
.89
.87
.91
1.24
.92
2.27
1.23
.86
1.26
1.19
2.72
1.15
.99
2.33
.53
.51
2.86
3.90
15.01
.89

Fig. 2. Long.

In which conv stands for conventional estimates of ination betas, Rit is

monthly return of an industry portfolio and t stands for monthly
ination rate. This is the standard model used in several papers in
prior work including Ang et al. (2011) and Bekaert and Wang (2010)
as recent examples. The conventional ination beta, in this framework,
measures the ination hedging ability of a stock and it is expected to be
positive if equities are good ination hedges. As discussed above the
central contribution of the present study is to decompose the rate of
ination into its frequency components and construct an enhanced
model as follows:
Rit Long Long Medium1 Medium1 Medium2 Medium2
Short Short t :

Note This table provides the summary statistics of the data.

4. Empirical ndings
The primary model to estimate the relation between stock returns
and ination is the following equation:
Rit conv t t

Fig. 1. Aggregate CPI.

Our primary argument is that that a frequency dependence on the

inationequity return relation is likely to exist and, therefore, ination
betas will show variation across components of ination. In particular, a
good ination hedge can be specied as a positive and statistically
signicant Short coefcient in this framework as this would indicate a
positive reaction to unexpected ination shocks. We estimate both the
conventional and frequency-dependent regression models using
monthly industry return data and report the results in Table 2.
We rst observe that all of the estimated conventional ination
betas are negative and furthermore, are statistically signicant for 28
out of 48 industries in our sample. As discussed in the Introduction,
this is consistent with the evidence reported in the literature starting
with early work in the 1970s, suggesting a negative covariance between
the stock market movements and ination. Even the commodity sensitive stocks, which are usually considered effective ination hedges, have
negative conventional ination betas including coal, oil, gold and mines.
In other words, the conclusion of this analysis is that equities do not
provide protection against ination risk at the industry level.
We proceed to estimate the frequency dependent regression model
depicted in Eq. (5) and report the ination betas on the decomposed
ination series, also in Table 2. Consistent with our a priori expectation,
the analysis now reveals the impact of different inationary shocks on
industry stock returns. Long term betas are largely consistent with
conventional betas in that they are always negative and are statically
signicant for a majority of the industries in our sample. This is not

Fig. 3. Medium1.

16

C. Ciner / Review of Financial Economics 24 (2015) 1217

Fig. 4. Medium2.

Fig. 5. Short.

surprising because, as mentioned above, monthly ination changes

largely reect a continuation of the long term trend.
Perhaps, the most interesting result for our paper is the behavior of
stock returns with respect to unexpected inationary shocks, which
are captured by short term betas in Eq. (5). Specically, we detect that
several industry indexes react differently to transitory ination shocks.
We nd that unexpected ination betas are positive and statistically signicant for 18 industry portfolios. Moreover, while there are exceptions,
there seems to be two groups of industries with positive unexpected
ination betas.
The rst group consists of commodity sensitive industries, such as
mines, coal, gold and oil. As mentioned in the Introduction, commodity
prices tend to be closely associated with ination, which is consistent
with this nding. The second group consists of technology related
industries such as telecoms, chips and software. It can be argued that
these industries are natural candidates as ination hedges. There is a
greater level of innovation in technology and companies in this group
tend to have more pricing power. Consequently, they are more likely
to pass the inationary shocks to their prots and ultimately, to their
stock prices.6
The above analysis uses value-weighted portfolios, which can potentially be dominated by larger companies in an industry. In an attempt to
determine whether the ndings reported above can be generalized for a
broader range of companies, we re-conduct the analysis using equallyweighted industry portfolio returns. These are, of course, more sensitive
to the behavior of smaller companies within a given industry. We report
the results of this analysis in Table 3, which show that the conclusions
are largely robust to the company size effect. Conventional ination
betas continue to be negative without an exception. When the frequency dependent regressions are estimated, unexpected ination betas are
found to be positive and statistically signicant for the same grouping of
industries as above. In other words, commodity sensitive industries
(gold and oil) and technology related industries (telecoms and chips)
continue to have positive sensitivities to unexpected ination.
Finally, we conduct the analysis using rm-level data. Even the
equally-weighted industry indices could mask the behavior of individual stocks. Moreover, some investors will rely on stand-alone stocks
in their investments rather than portfolios; hence, the analysis could
be useful in that aspect. We select our rm-level data from the oil
and gas sector primarily because the above analysis shows that this industry is a candidate for providing a hedge against ination risk. We

consider six large integrated oil and gas companies: Chevron (CVX),
ConocoPhillips (COP), Exxon Mobil (XOM), Hess (HES), Marathon Oil
(MRO) and Murphy Oil (MUR). We report the ndings for this part of
the analysis in Table 4 and, save for MUR, there is a positive and statistically signicant relation between the unexpected component of ination and these individual stock returns at the 10% level, suggesting that

6
To examine the robustness of our ndings, we also used time series models to decompose ination. Specically, we estimated expected ination using both VAR(1) and
AR(2) models for three selected industries; reit, n and gold. We chose those industries
because they have positive and statistically signicant unexpected ination betas. The unexpected ination betas are .31 (.79) for reit, .96 (.40) for n and 1.93 (.27) for gold when a
VAR(1) model is used. When, an AR(2) model is used, they are 1.01 (.17) for reit, 1.33 (.29)
for n and 2.86 (.13) for gold. These results are consistent with the view that time series
models are unlikely to capture the dynamics uncovered by the AshleyVerbrugge decomposition used in the paper and also, that it is difcult to determine the correct forecasting
model to determine expected ination. We thank an anonymous referee for suggesting
this analysis.

Table 2
Ination betas: value-weighted industry portfolios.
Industry

Conventional

Long

Medium1

Medium2

Short

Agric
Food
Soda
Beer
Smoke
Toys
Fun
Books
Hshld
Clths
Hlth
MedEq
Drugs
Chems
Rubbr
Txtls
BldMt
Cnstr
Steel
FabPr
Mach
ElcEq
Aero
Ships
Guns
Gold
Mines
Coal
Oil
Util
Telcm
Persv
Bussv
Hardw
Softw
Chips
LabEq
Paper
Boxes
Trans
Whlsl
Rtail
Meals
Banks
Insur
Real
Fin

.10 (.81)
.19 (.45)
1.03 (.03)
.29 (.36)
.02 (.95)
.70 (.11)
1.59 (.01)
1.19 (.01)
.34 (.26)
.79 (.07)
.12 (.79)
.52 (.05)
.29 (.26)
.92 (.04)
.88 (.09)
1.20 (.22)
1.01 (.08)
.93 (.04)
1.04 (.08)
.56 (.30)
1.01 (.03)
1.02 (.02)
.75 (.06)
.81 (.14)
.26 (.52)
.99 (.14)
1.61 (.00)
.94 (.27)
.39 (.28)
.10 (.69)
.80 (.01)
.21 (.59)
.64 (.04)
1.16 (.01)
.87 (.01)
.78 (.08)
.64 (.08)
.82 (.04)
.95 (.01)
.26 (.49)
.55 (.07)
.61 (.03)
.51 (.08)
.41 (.84)
.69 (.10)
1.39 (.06)
.94 (.03)

.09 (.86)
.22 (.47)
1.19 (.02)
.45 (.18)
.02 (.96)
.54 (.26)
1.89 (.00)
1.62 (.00)
.58 (.07)
.94 (.06)
.23 (.59)
.66 (.05)
.27 (.38)
1.05 (.04)
1.04 (.05)
1.47 (.13)
.98 (.11)
.69 (.21)
.85 (.26)
.78 (.28)
1.09 (.06)
1.05 (.04)
.70 (.13)
.75 (.22)
.38 (.44)
.31 (.72)
1.33 (.06)
1.75 (.10)
.30 (.49)
.17 (.60)
.81 (.04)
.08 (.86)
.65 (.10)
1.45 (.01)
.95 (.06)
.78 (.20)
.72 (.16)
1.07 (.01)
1.00 (.01)
.43 (.29)
.57 (.14)
.65 (.06)
.40 (.24)
.64 (.21)
.73 (.12)
1.26 (.08)
.87 (.12)

3.24 (.22)
.26 (.68)
1.69 (.25)
.25 (.73)
1.09 (.31)
.75 (.60)
.73 (.69)
1.36 (.34)
.61 (.46)
.31 (.81)
1.91 (.10)
.83 (.32)
.56 (.46)
1.22 (.28)
1.03 (.52)
.93 (.73)
1.37 (.43)
2.03 (.16)
2.20 (.27)
1.60 (.38)
1.79 (.18)
.84 (.54)
.46 (.68)
.74 (.76)
.03 (.97)
2.41 (.15)
2.97 (.07)
2.23 (.17)
1.71 (.07)
.30 (.68)
.99 (.33)
.62 (.61)
1.41 (.13)
.32 (.79)
1.06 (.30)
1.50 (.23)
1.69 (.12)
.85 (.48)
.96 (.40)
.39 (.73)
1.05 (.22)
.84 (.33)
.25 (.78)
.04 (.97)
.45 (.73)
2.46 (.27)
2.34 (.07)

2.54 (.22)
.17 (.85)
.66 (.78)
.82 (.43)
.94 (.59)
1.74 (.41)
.06 (.97)
2.11 (.22)
.67 (.54)
.18 (.92)
2.10 (.22)
.89 (.55)
.13 (.90)
.42 (.80)
.42 (.78)
.62 (.82)
.82 (.63)
1.67 (.37)
1.17 (.65)
1.88 (.41)
.38 (.81)
.76 (.61)
1.25 (.39)
1.21 (.54)
.44 (.79)
4.42 (.16)
2.34 (.30)
6.23 (.05)
.12 (.93)
.59 (.56)
.40 (.75)
.82 (.58)
.21 (.87)
.36 (.83)
.06 (.96)
.02 (.99)
1.00 (.56)
1.10 (.47)
.58 (.74)
.54 (.71)
.10 (.93)
.14 (.90)
1.92 (.20)
.94 (.65)
.51 (.77)
1.20 (.63)
.13 (.94)

24.06 (.00)
4.20 (.46)
.68 (.94)
1.20 (.83)
6.15 (.48)
7.15 (.33)
8.65 (.42)
10.31 (.11)
1.26 (.79)
3.47 (.67)
4.72 (.59)
13.06 (.07)
5.33 (.32)
14.41 (.07)
4.44 (.51)
1.63 (.89)
9.51 (.20)
9.80 (.23)
29.50 (.00)
11.50 (.25)
19.53 (.01)
17.90 (.01)
8.16 (.30)
11.43 (.24)
3.46 (.70)
29.06 (.06)
20.95 (.04)
31.30 (.05)
18.56 (.00)
3.49 (.46)
14.47 (.02)
3.15 (.63)
12.88 (.02)
8.45 (.36)
19.17 (.03)
21.52 (.02)
22.10 (.00)
6.55 (.31)
.51 (.94)
6.97 (.31)
10.59 (.07)
2.43 (.69)
5.82 (.36)
4.00 (.64)
5.09 (.46)
22.98 (.03)
15.94 (.08)

Note This table provides the ination beta for value-weighted industry portfolios
calculated by the conventional and frequencydecomposition approaches. Bold entries
signify statistical signicance.

C. Ciner / Review of Financial Economics 24 (2015) 1217

Table 3
Frequency dependent regressions: equally-weighted industry portfolios.
Industry

Conventional

Long

Medium1

Medium2

Short

Agric
Food
Soda
Beer
Smoke
Toys
Fun
Books
Hshld
Clths
Hlth
MedEq
Drugs
Chems
Rubbr
Txtls
BldMt
Cnstr
Steel
FabPr
Mach
ElcEq
Aero
Ships
Guns
Gold
Mines
Coal
Oil
Util
Telcm
Persv
Bussv
Hardw
Softw
Chips
LabEq
Paper
Boxes
Trans
Whlsl
Rtail
Meals
Banks
Insur
Real
Fin

.42 (.43)
.73 (.02)
.94 (.04)
.71 (.05)
.53 (.30)
1.24 (.02)
1.34 (.01)
2.49 (.00)
1.25 (.02)
1.25 (.02)
.53 (.19)
.92 (.02)
1.17 (.04)
1.15 (.02)
1.07 (.04)
1.32 (.09)
.84 (.09)
1.10 (.05)
.76 (.20)
.73 (.25)
.83 (.07)
.89 (.04)
.64 (.15)
.92 (.18)
.94 (.03)
2.35 (.00)
2.04 (.00)
.78 (.41)
.48 (.49)
.17 (.43)
1.66 (.00)
.99 (.02)
1.09 (.00)
1.42 (.00)
1.30 (.00)
1.26 (.01)
.83 (.05)
1.62 (.00)
.93 (.02)
.77 (.09)
1.09 (.02)
1.48 (.00)
1.24 (.01)
.06 (.85)
.68 (.09)
1.33 (.02)
.81 (.03)

.52 (.38)
.72 (.06)
1.20 (.02)
.66 (.09)
.90 (.17)
1.41 (.02)
1.50 (.01)
2.94 (.00)
1.59 (.00)
1.44 (.00)
.51 (.31)
1.09 (.03)
.94 (.18)
1.34 (.02)
1.46 (.01)
2.33 (.00)
.87 (.12)
.89 (.15)
.80 (.26)
.84 (.22)
1.06 (.07)
1.08 (.04)
.69 (.16)
.94 (.20)
.81 (.15)
1.85 (.10)
2.13 (.00)
1.75 (.14)
.63 (.46)
.25 (.37)
1.85 (.00)
.95 (.05)
1.15 (.02)
1.52 (.02)
1.51 (.01)
1.40 (.04)
1.10 (.04)
2.09 (.00)
1.03 (.04)
.84 (.09)
1.16 (.02)
1.56 (.00)
.1.22 (.02)
.15 (.68)
.54 (.22)
1.49 (.01)
.72 (.10)

3.04 (.04)
1.45 (.10)
1.79 (.18)
.96 (.35)
.63 (.74)
1.30 (.31)
2.06 (.19)
2.21 (.21)
1.24 (.45)
.69 (.66)
2.35 (.06)
1.84 (.07)
3.31 (.02)
1.27 (.33)
.08 (.96)
.41 (.85)
1.66 (.27)
3.02 (.08)
2.54 (.17)
1.59 (.40)
1.41 (.30)
1.96 (.13)
1.09 (.39)
1.36 (.52)
2.39 (.03)
6.40 (.00)
4.42 (.01)
1.09 (.54)
2.44 (.12)
.42 (.57)
2.28 (.10)
2.09 (.14)
2.42 (.01)
2.58 (.06)
2.28 (.06)
2.39 (.09)
1.91 (.11)
1.55 (.36)
1.17 (.32)
.91 (.51)
2.24 (.08)
2.16 (.71)
2.28 (.12)
.07 (.95)
1.04 (.41)
2.01 (.27)
1.85 (.09)

2.49 (.19)
.10 (.93)
1.67 (.40)
.77 (.58)
2.11 (.38)
.12 (.94)
.41 (.82)
.64 (.78)
1.31 (.46)
.21 (.91)
.82 (.63)
1.13 (.49)
.44 (.81)
.45 (.81)
.90 (.62)
5.20 (.02)
.17 (.92)
.94 (.64)
1.15 (.62)
.93 (.66)
1.44 (.40)
1.47 (.39)
.19 (.90)
.10 (.96)
.78 (.68)
2.34 (.52)
.73 (.77)
6.60 (.04)
2.46 (.29)
.58 (.52)
.40 (.83)
.38 (.81)
.55 (.71)
.48 (.80)
1.14 (.54)
.89 (.66)
2.11 (.21)
1.78 (.36)
.02 (.98)
.10 (.95)
.39 (.80)
.33 (.87)
.51 (.80)
.58 (.68)
1.33 (.44)
.48 (.83)
.55 (.71)

15.95 (.15)
4.93 (.44)
2.04 (.81)
6.12 (.31)
8.80 (.39)
12.21 (.14)
5.33 (.53)
11.15 (.28)
9.62 (.20)
6.42 (.47)
10.11 (.22)
11.41 (.20)
15.70 (.22)
14.42 (.09)
.03 (.99)
2.32 (.79)
8.98 (.24)
12.75 (.19)
17.02 (.08)
23.88 (.01)
18.59 (.02)
17.86 (.03)
9.31 (.26)
24.48 (.01)
3.51 (.71)
33.27 (.02)
23.46 (.03)
19.87 (.28)
32.05 (.00)
3.56 (.38)
24.37 (.01)
7.68 (.30)
13.13 (.08)
20.19 (.07)
17.27 (.12)
22.33 (.04)
20.61 (.02)
9.41 (.28)
.49 (.95)
5.56 (.47)
8.14 (.30)
4.20 (.65)
1.20 (.89)
1.95 (.75)
6.09 (.33)
10.76 (.29)
10.33 (.14)

Note This table provides ination betas for equally-weighted portfolios using conventional
and frequency decomposition approaches. Bold entries signify statistical signicance.

the industry portfolio ndings can be largely generalized to rm-level

data at least for the oil and gas industry.
5. Conclusions
Our ndings suggest that signicant frequency dependence exists in
the relation between stock returns and ination rate. Trend shocks,
which are those with greater persistency, have a negative covariance
Table 4
Ination betas: oil company stocks.

CVX
COP
XOM
HES
MRO
MUR

Conventional

Long

Medium1

Medium2

Short

.29 (.43)
.35 (.45)
.14 (.61)
.33 (.61)
.37 (.47)
.81 (.31)

.04 (.90)
.39 (.51)
.19 (.56)
.56 (.46)
.03 (.96)
.62 (.35)

1.26 (.27)
.83 (.55)
1.44 (.14)
2.72 (.02)
3.12 (.02)
1.72 (.17)

1.11 (.53)
.61 (.74)
1.40 (.32)
3.47 (.13)
.37 (.86)
1.30 (.55)

13.69 (.05)
23.24 (.00)
9.90 (.09)
26.77 (.01)
29.28 (.00)
16.93 (.13)

Note This table provides the ination beta for oil company stocks using the conventional
and frequency domain approaches. Bold entries signify statistical signicance.

17

with equity returns in all of the industries examined. However, we

argue that this relation can be spurious if the impact of ination on
stock valuations is anticipated by market participants. If, for example,
greater ination leads to lower economic growth in the future as
Fama (1981) has suggested, market valuations will be lowered in anticipation, generating negative ination betas. This argument is particularly relevant for a highly persistent macroeconomic variable like ination.
Long term trend ination betas are very similar to aggregate ination
betas because the majority of monthly changes in ination is simply a
continuation of the long term trend.
On the other hand, higher frequency ination shocks are transitory
by nature, which implied that they cannot be anticipated. Therefore, a
correct test of the sensitivity of stock returns to ination should examine the link between high frequency inationary shocks and equities,
which is accomplished in this study. We nd that commoditysensitive and technology-related equities do provide good ination
hedges in that they have positive and statistically signicant links
with unexpected ination. This conclusion is largely robust to using
value-weighted and equally-weighted industry portfolios as well as
for a set of individual company share prices selected from the oil industry. Our study, overall, also has a noteworthy implication. When highly
persistent macroeconomic data are used in nancial research, accounting for frequency dependencies could yield richer results.
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