**Authors:** Tarek Eldomiaty, Yasmeen Saeed, Rasha Hammam, Salma AboulSoud **Published:** _Journal of Economics, Finance and Administrative Science_, 2020 **Link:** [Emerald Insight](https://www.emerald.com/insight/2077-1886.htm) --- ### Summary This study examines how **inflation rates** and **interest rates** impact **stock prices** in non-financial firms listed on **DJIA30** and **NASDAQ100** between 1999 and 2016. The analysis uses the **Stock Duration Model** to measure these relationships. --- ### Key Points - **Inflation and Stock Prices:** - There is a **negative relationship** between inflation rates and stock prices. When inflation increases, stock prices tend to decrease. - This finding is consistent with historical theories like **Fama’s hypothesis** and the **Inflation-Stock Returns Puzzle**. - **Interest Rates and Stock Prices:** - Contrary to common expectations, the study finds a **positive relationship** between real interest rates and stock prices. - This suggests that rising interest rates may drive investors to increase stock prices to maintain market positions, which is unusual compared to traditional financial models. - **Long-Term Equilibrium:** - Using #Johansen #Cointegration Tests, the study confirms a **long-term equilibrium** relationship between stock prices, inflation, and real interest rates - This means that over time, the three variables move together predictably. - **Causality:** - #Granger Causality Tests show that changes in **real interest rates cause changes in stock prices**, and **changes in inflation affect real interest rates**. - This supports the theory that monetary policy adjustments in response to inflation can impact stock market behavior. --- ### How It Works 1. **Stock Duration Model:** Measures sensitivity of stock prices to inflation and interest rates. 2. **Panel Johansen Cointegration Test:** Confirms long-term relationships. 3. **Granger Causality Test:** Identifies the direction of influence between variables. --- ### Strengths - Validates long-term price discovery in stock markets. - Demonstrates unique findings about interest rates positively influencing stock prices. - Uses robust econometric tests to confirm relationships. --- ### Limitations - Focuses only on **non-financial firms**; financial institutions are excluded. - Data is limited to **DJIA30 and NASDAQ100**, which may not generalize globally.