2005/02/01 by Bhagwan Chowdhry, Richard Roll, Yihong Xia · 1 citation
Economics, Econometrics and Finance · Mathematics · #Econometrics #Economics #Exchange rate #Financial Markets and Investment Strategies #Financial economics #Inflation (cosmology) #Market Dynamics and Volatility #Mathematics #Monetary Policy and Economic Impact #Monetary economics #Price index #Proxy (statistics) #Purchasing power parity #Relative price #Relative purchasing power parity #Stock (firearms)
paper · doi:10.1257/0002828053828554
openalex publication_date 2005/02/01 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/02
Relative purchasing power parity (PPP) holds for pure price inflations, which affect prices of all goods and services by the same proportion, while leaving relative prices unchanged. Pure price inflations also affect nominal returns of all traded financial assets by exactly the same amount. Recognizing that relative PPP may not hold for the official inflation data constructed from commodity price indices because of relative price changes and other frictions that cause prices to be “sticky,” we provide a novel method for extracting a proxy for realized pure price inflation from stock returns. We find strong support for relative PPP in the short run using the extracted inflation measures.