Using ardl approach to investigate hedging power of common stocks against inflation in pakistan

It seems like a puzzle whether stocks have the ability or not to protect from inflation. This study empirically investigated such relationship whether stocks provide hedge or not against the inflation. Monthly data of inflation and stock returns is used for the study to identify and measure the relationship. Period of the study was taken from year 2001 to 2012. Data stationarity is checked through augmented dickey fuller (ADF) and Philipp’s Peron (PP) unit root tests. For testing long term relationship between stocks returns and inflation, WALD test is used. For short term relationship Error Correction Mechanism (ECM) test is used. Evidence comes in favor that relationship exist in short term as well as in long term, because both the WALD and ECM tests support the findings of the study as per theory.